SACRAMENTO — California’s $3 billion projected budget shortfall has shrunk, Gov. Gavin Newsom will announce Thursday, allowing him to propose some modest new spending on healthcare and post-wildfire reconstruction.
Newsom is proposing $300 million in healthcare premium assistance to make up for some federal health care cuts, though that sum will not go far in addressing the billions in reductions to federal health spending. Newsom also wants to slash fees for new small businesses, according to a fact sheet provided by his office, though he has not specified which businesses would qualify. He is also proposing a $100 million fund to help homeowners rebuild after wildfires when their insurance doesn’t cover the full cost to reconstruct their homes.
To reduce the cost of building new housing, Newsom also wants to prohibit cities and counties from charging affordable housing developers “impact fees” to fund infrastructure and schools if they are applying for state funding to help build the housing.
Starting in 2027, Newsom is also proposing a cap on corporate tax credits of $5 million or 50% of a corporation’s tax liability — whichever is greater, which Newsom says will help balance future budgets.
In her May report on the state’s spending and tax collection, Controller Malia Cohen announced that the state’s financial outlook had improved significantly since Newsom released his initial state budget plan in January. Since the January estimates, the state has collected $13 billion more in tax revenue and has spent $7 billion less than projected.
“While revenues are currently coming in above projections, California’s fiscal outlook remains closely tied to the performance of financial markets and a relatively small share of high-income taxpayers,” Cohen wrote in a statement. “As lawmakers carefully craft the next state budget, this is the time to remain disciplined by prioritizing debt reduction, protecting reserves, and preserving the flexibility we need to weather economic uncertainty.”
That’s good news for Newsom as he begins to negotiate his final state budget plan as governor before reaching the end of his term limit in January.
California’s budget is heavily dependent on high taxes on its richest residents, whose incomes fluctuate dramatically based on the stock market, where they make much of their money. The Legislative Analyst’s Office, which advises the state Legislature on budget issues, has warned that the strong revenue trends recently are driven by a stock market buoyed by optimism over artificial intelligence. If it turns out the AI boom is a bubble, that could cause a stock market dip, which in turn could inflict major damage on the state’s finances.
Newsom’s projections on Thursday represent an improvement from the assessment his administration announced in January, when the state’s Department of Finance projected a $3 billion shortfall for the 2026-27 year. That was, in turn, much lower than the $18 billion shortfall projected by the Legislative Analyst’s Office in late 2025.
The governor’s Department of Finance and the analyst’s offer typically offer different budget outlook projections, in part because the analyst’s estimates are based on earlier data.
Last year, Newsom and state lawmakers cut state spending, including by rolling back healthcare benefits for undocumented immigrants, and took money out of reserves to fill a projected $12 billion deficit in the current 2025-26 state budget, which took effect in July. The current budget totals $321 billion.
Newsom’s proposal marks the start of the final month of budget negotiations with the Legislature, which must approve all budget legislation. Newsom and lawmakers must reach a deal on the state budget by mid-June, in time for the start of the next fiscal year on July 1.