California’s budget deficit has likely grown. Gov. Gavin Newsom will reveal his plan to address it

SACRAMENTO, California — California Governor Gavin Newsom will update his budget proposal on Friday, and the news likely won’t be good.

Newsom, during his final term as governor and widely seen as a future presidential candidate, announced a nearly $38 billion deficit in January, driven by declining revenues. Days later, the nonpartisan Legislative Analyst’s Office said the deficit was actually $58 billion, including some cuts to state education spending.

State officials needed a big rebound in tax collections to improve things, but that hasn’t happened. Through the end of April, state tax collections from the three largest sources — personal income, businesses and sales — fell more than $6 billion below the previous estimate.

That means the deficit has likely grown, and Newsom will have to propose more ways to solve the deficit. This is the second year in a row that California has run a deficit, and so far the state has avoided the most painful cuts to major ongoing programs and services. Instead, Newsom and lawmakers have cut one-time spending, postponed other spending and borrowed from other bills.

A larger shortage could lead to more difficult choices. In January, Newsom raised the possibility of delaying a minimum wage increase for health care workers, which Newsom signed last year with much fanfare.

“We still have a shortage. We will manage it and we will manage it, yes, without across-the-board tax increases,” Newsom said Wednesday at an event held by the California Chamber of Commerce. “We are not just going to try to find a solution this year. I want to solve it for next year. I think it’s too important. We have to be more disciplined.”

State budgeting is a gambling game, especially in California, where a progressive tax system means the state gets most of its tax revenue from rich people. About half of the state’s income tax collections in 2021 came from just 1% of the population. This makes the state more vulnerable to stock market fluctuations.

If lawmakers and Newsom get the revenue projections wrong and the state takes in less than they thought, there will be a deficit. And unlike the federal government, California’s Constitution requires the state to have a balanced budget.

Their predictions were way off last year after a series of devastating storms in January 2023 led to lengthy delays in tax filing deadlines. Instead of filing their tax returns in April, most Californians could wait until November. Lawmakers still had to pass a budget in June despite not knowing how much money they had.

In January, Newsom said state revenues for the 2022-23 through 2024-25 period came in $42.9 billion lower than they estimated.

Newsom and lawmakers have already agreed to about $17 billion in cuts and deferrals to reduce the budget deficit. In addition, Newsom has said he wants to take $13 billion from the state’s various savings accounts to balance the budget.

But these won’t close the gap, and California appears headed for even more shortages in the future.

Corporate tax collections fell 15% from last year, the fourth largest decline in the past four decades, the LAO said. And while income taxes are rising thanks to a 20% rise in the stock market since October, driving an 8% increase in total income tax collections this year, the LAO said the growth is unlikely to continue. That’s because the broader state economy has not improved: the unemployment rate has risen and investment in California businesses has declined.

After Newsom unveils his proposal Friday, state lawmakers will have until June 15 to pass a balanced budget. The new financial year starts on July 1.