The California Legislative Analyst’s Office has reported that Gov. Gavin Newsom and lawmakers may face a $2 billion budget deficit next year. While the outlook for next year appears relatively small, future projections show a worsening financial situation, especially with potential changes under the incoming Trump administration. The preliminary fiscal report has been acknowledged by the Newsom administration, which emphasized the need to prepare for uncertainties due to external factors beyond the state’s control. The state’s budget picture through summer 2026 has been analyzed, with an official deficit estimate set to be unveiled in January.
The forecast shows that California is in a better financial position compared to earlier this year, with higher-than-expected tax revenues helping to offset the deficit. The state is projected to receive $7 billion more in tax revenue above previous estimates, with support from the rainy day fund and limitations on corporate tax deductions. However, the Legislative Analyst’s Office has warned that revenues are not high enough to accommodate new spending commitments, with forecasts showing deficits of about $20 billion in 2026-27 and $30 billion by 2028-29.
California is also expecting additional costs from the passage of Propositions 35 and 36, as well as new expenses related to a minimum wage increase for healthcare workers. Lawmakers are urged to show restraint in this year’s budget to prepare for any future challenges, including potential impacts from Washington. State Sen. Roger Niello has expressed concerns about the threat of higher tariffs under the incoming Trump administration and emphasized the importance of California Republicans in bridging the divide with the federal government.
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