The California Legislative Analyst’s Office reported Wednesday that Gov. Gavin Newsom and the lawmakers may face a very small budget deficit of $ 2-billion next year, but he warned that the outlook looks very bad in the future and does not look for changes under the incoming Trump administration.
The Newsom administration agreed with the key principles of the first fiscal report and said the state should “expect greater uncertainty than usual.”
“Every California budget can be affected by forces outside of our control — whether it’s conflicts overseas or an unpredictable stock market here at home,” said HD Palmer, a spokesman for the governor’s Department of Finance, in a statement. “But this year, we have the added uncertainty of major changes in federal policy next year under the new administration, and how policies such as higher taxes and immigration reform could add additional costs that affect not only California’s economy, but ours as well.”
The opinion released from the non-participating financial adviser of the Legislature gives lawmakers the first analysis of the state budget picture until the summer of 2026. Newsom will reveal the official deficit estimate when he presents his budget plan in January.
LAO said the state should be in a much better financial position in next year’s budget than earlier this year when Democrats were forced to combine nearly $50 billion. Analysts say the change involves higher-than-expected tax revenues and earlier actions to address the shortfall.
The forecast assumes the state will receive about $7 billion more in tax revenue than estimates made in July. The balanced budget vision through 2025-26 also relies on $7 billion from the state’s rainy day fund, which Newsom and lawmakers had previously agreed to, and further limits on corporate tax deductions and credits.
“It’s actually driven by income gains among high-income taxpayers, who benefit the most from the strong stock market trend we’ve been seeing,” said Gabriel Petek, a legal analyst.
But Petek cautioned that revenues are not high enough for lawmakers to make new spending commitments. The LAO predicts a deficit of $20 billion in 2026-27 and a peak deficit in 2028-29 of around $30 billion.
California’s economy has been slowing down for the past two years, Petek said. Job creation has been in the government and health care sectors, with the state reporting about 25% of the overall unemployed workforce. He also pointed out the decline in consumer spending habits.
The passage of Proposition 35, which expands taxes on managed health care plans, and Proposition 36, which increases fines for some drug and theft offenses, is expected to add an estimated $3 billion in federal spending by the summer of 2026.
California also expects new costs related to a minimum wage increase of $25 for health care workers. The LAO said their view creates higher costs to fight wildfires, but does not account for other unforeseen disasters, such as earthquakes or other epidemics.
“We need to show restraint with this year’s budget, because California must be ready for any challenges, including those from Washington,” said Assembly Speaker Robert Rivas (D-Hollister) in a statement. “This is not a time to expand programs, but to protect and maintain services that truly benefit all Californians.”
State Sen. Roger Niello (R-Roseville) said he shares concerns about the threat of higher tariffs, which Trump has vowed to impose when he takes office, both on his auto dealership and as the state’s largest exporter.
He offered a reminder to Democrats that California Republicans can help bridge the gap with the Trump administration.
“It would be a good idea for the governor to remember that even though Republicans are in the minority here, we still have a lot of Republicans involved in state government, and we would be very concerned about the financial impact,” Niello said. he said with the help of disasters and other problems.
“We have a lot of relationships with Republicans in Congress, not just in California, but beyond California. The president and the Republican administration, I would have to believe that they will pay for the concerns that California Republicans may have,” he said.
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