Gov. Jerry Brown’s last budget spent $140.4 billion in the general fund for fiscal year 2018-19. Newsom’s May Revision to his 2026-27 budget exploded that to $246.6 billion. That’s a 76% increase in eight years at a time the state’s population didn’t grow and the Consumer Price Index rose just 32% from Jan. 2019 to April 2026.
Yet his “May Revise,” in Sacramento parlance, was “balanced.” That will take him through January, when he leaves office and begins the serious part of his expected presidential bid. The reason, of course, is Silicon Valley and San Francisco are enjoying their latest boom, with artificial intelligence creating a new Gold Rush, this time based on silicon. Luck.
In its Initial Comments on the proposal, the Legislative Analyst’s Office pointed to a 50% increase in personal income tax collections in just the past three years. But the LAO also warned Newsom raided “roughly $20 billion in reserve withdrawals and suspended deposits, as well as $4 billion in borrowing (on top of tens of billions of dollars in existing borrowing), to achieve budget balance.”
The problems will hit for the state, and especially city and county governments, after he’s gone to campaign in the snows of New Hampshire. The LAO warned of continuing “structural deficits” of $20 billion to $30 billion. And even a mild market downturn such as that in 2022 means “the revenue hole could be $100 billion.”
What it means for cities
Although the Proposition 13 property tax limitation from 1978 was crucial for the state’s prosperity, it did create imbalances for local budgets by making them more dependent on state funding. That has brought continuous complaints of stinting local governments on state funds.
League of California Cities Executive Director and CEO Carolyn Coleman attacked Newsom’s May Revision. She said that while it helped reduce unsheltered homelessness, “he proposes cutting round 7 of the Homeless Housing, Assistance and Prevention grant program — the backbone of the state’s local homelessness response system….”
The Cal Cities staff also noted the proposal pushed for a new sales tax on “digital prewritten software and software as a service,” which currently is exempt. That would raise $1.1 billion a year when fully implemented. The new funds would join other city and county sales tax revenues. It would not apply to streaming media, such as Netflix.
Although no bill yet proposes the tax increase, Newsom’s Department of Finance has released a trailer bill with the language.
The tax increase generated immediate opposition from anti-tax groups. The California Taxpayers Association organized a protest letter signed by the Business Software Alliance, the California Business Roundtable, the California Retailers Association and other groups. It was sent to the members of the Senate Budget Subcommittee No. 4.
“For nearly a century, California’s sales and use tax has applied only to sales of tangible personal property,” the letter said. The Newsom tax increase, if enacted, would move the state “toward the taxation of services.” Taxed services could include artificial intelligence, cyber security, e-commerce payments, email and word processing, finance and bookkeeping, fitness and insurance, payroll and HR and marketing and advertising.
Jeissy Lee of the California Taxpayers Association testified May 20 before the Assembly Budget Subcommittee No. 5 on State Administration, “The expansion of a sales and use tax to all sales of digital prewritten software and software as a service sets a dangerous precedent for taxing services, which would significantly increase prices for consumers at a time when Californians struggle with affordability.”
What it means for counties
The California State Association of Counties complained, for In-Home Supportive Services, the Newsom proposal “retains a $233.6 million shift in IHSS costs from the state to counties — an approach overwhelmingly rejected in both the Senate and Assembly budget frameworks. This cost shift would undermine the existing fiscal structure for IHSS and directly strain all county safety net services.”
And CSAC wrote, “yet again” there was no funding for Proposition 36, which voters in November 2024 passed, 68%-32%. It toughened penalties for drug and petty theft crimes. But it purposely did not include a funding mechanism because a tax increase would have sparked opposition from anti-tax groups. And a dedicated spending amount would have angered public-employee unions who want the money for themselves.
What it means for schools
Local K-12 schools will enjoy a $6.4 billion windfall above Newsom’s January proposal. That’s because the AI cornucopia produced $16.5 billion in higher revenues from Newsom’s January budget proposal. The schools windfall is 39% of that revenue boost, close to the minimum of about 40% of the budget guaranteed by Proposition 98. The California Association of School Business Officials celebrated the increase as “significant.”
Yet the California Teachers Association President David Goldberg griped, “The governor’s proposed budget revision clearly ignores the will of voters by proposing to withhold $3.9 billion from California’s constitutionally-guaranteed Prop. 98 funding minimum.” That’s the “$4 billion in borrowing” the LAO mentioned, above. It’s what’s called a “settle-up obligation” from funds withheld during past budget crunches.
The key number is per-pupil spending. It rose from $27,418 in the January proposal to $28,282 in the May Revise. For a class of 30, that’s $848,460. It’s obvious California’s problem of low test scores isn’t due to a lack of money, but from the CTA stalling needed reforms such as more school choice.
The twin towers of debt
As the June 15 constitutional deadline to pass a budget draws near, all sorts of finagling and dealmaking will occur among the governor, the Legislature and the public-employee unions and other special interests. But Newsom, as he checks out of the Hotel California aiming for the White House, is ignoring not just a potential $100 billion future budget deficit.
He’s also postponing to his successors dealing with $176.5 billion in “long-term liabilities for pensions, other post-employment benefits, and compensated absences,” according to Controller Malia Cohen. That’s from her just-released Annual Comprehensive Financial Report for fiscal year 2024-25, which ended on June 30, 2025.
Call it the Twin Towers of Newsom Debt, just waiting to fall on the state and also collapse city, county and school budgets.
John Seiler is on the Editorial Board of the Southern California News Group.