California Gov. Gavin Newsom unveiled his revised 2026-27 state budget proposal Thursday, saying the state has eliminated its structural deficit through July 2028 while maintaining nearly $30 billion in reserves.
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Key measures include a sales tax on digital software and business-to-business Software as a Service transactions, expected to generate $900 million for the state and $1.1 billion for local governments.
Additionally, the budget proposes capping corporate tax credits for large companies, which Newsom said pay less in taxes than small businesses, while simultaneously offering a 50% tax cut for hundreds of thousands of new small businesses through lower LLC fees.
Newsom, identifying as a small business owner, critiqued corporate tax avoidance, stating that some of the world's largest companies pay less in taxes than his "little wine store." To address this, the budget proposes what he called a cap on the "hoarding" of tax credits by large corporations.
The tax proposal offers a 50% tax cut for hundreds of thousands of new small businesses through lower LLC fees, he said.
"From both a policy and political perspective, the road ahead is unclear: an unsettled economy, billions of dollars in costly proposed tax increases aimed for both state and local ballots, and a divisive election season in California and across the nation," the California Chamber of Commerce said in a statement.
Newsom's spending plan commits to balancing the budget through the 2027-28 fiscal year and delivers a $1.8 billion reduction in spending, Newsom said.
He called his proposal a detailed plan that "cuts deficits without cutting corners."
California governors release a preliminary budget
The state's coffers grew by $16.5 billion compared to January, just from the state's big three revenue sources: personal income, corporate and sales taxes, Newsom said.
The Legislative Analyst's Office has estimated revenue projections are $53.6 billion higher than anticipated in November, said Newsom, who posted a
He also emphasized his reasoning behind only pushing forward one-time spending with no new big program expenditures, pointing to the state's historic revenue volatility, because of its dependence on capital gains taxes.
"This revenue volatility shows how revenue spikes from year-to-year and then collapses," Newsom said. "When the nation gets a cold, we get the flu."
The proposal introduces new revenue streams to address revenue volatility and federal funding cuts
"There are $1.8 billion in new costs in this budget associated with HR 1," Newsom said. "So that's the backdrop to the May revise."
Despite fiscal tightening, the budget maintains significant spending on core services. Education would receive a record $2.4 billion ongoing increase for special education and a $5 billion block grant for teacher development. The proposal also includes 14 weeks of paid pregnancy leave for TK-12 and community college employees. In healthcare, $300 million is allocated to protect affordability against federal subsidy cuts, and the managed care organization tax is expected to generate $4.5 billion in the short term.
Addressing the state's historical revenue volatility, Newsom proposed doubling the rainy day fund requirement from 10% to 20% under Proposition 2,
He added that the state's bond ratings have validated this "responsible approach," though there is more work to be done in the coming years.
The state has paid down $15.4 billion in unfunded liabilities over his seven-and-a-half years in office, he said, resulting in ratings of Aa2 from Moody's Ratings and AA from Fitch Ratings. S&P Global Ratings' AA-minus was missing from his slide. All three assign stable outlooks.
Newsom said his budget is a responsible, two-year balanced plan designed to ensure stability beyond the end of his term in January while reducing out-year deficits by 50%.
He defended the digital software tax, pointing out the inconsistency where consumers pay sales tax on physical software at stores like Best Buy but avoid it via downloads. He noted that 35 other states already tax these transactions.
The proposal specifically targeting business-to-business transactions, which Newsom said account for 75% of such activity. He clarified the state is not pursuing a streaming tax at this time.
The budget does not propose significant new ongoing general fund spending commitments, Newsom said, prioritizing fiscal restraint and long-term sustainability. The state's reserves, including the growing Rainy Day Fund, would be maintained at nearly $30 billion.
The state's total available cash position, which includes special funds, currently stands at
Despite the fiscal tightening, the revised budget maintains significant investments in key sectors, Newsom said, highlighting growth in education, higher education and healthcare.
It would allocate $300 million to protect healthcare affordability, specifically targeting Trump administration cuts to Affordable Care Act subsidies.
The Republican minority caucus disagreed with the governor's take on his proposed budget.
"Despite record revenues this year, California's long-term fiscal outlook remains deeply concerning," said Assemblyman David Tangipa, R-Fresno, vice chair of the Assembly Budget Committee.
"This budget reflects a pattern of deferred decision-making — kicking structural problems down the road for the next governor and legislature to inherit. Gov. Newsom appears to define fiscal success narrowly: if the budget doesn't collapse on his watch, it's a balanced one. This boom-and-bust approach to budgeting is simply not sustainable."
