CALIFORNIA BUDGET IS $12 BILLION IN THE RED AMID TRUMP TARIFFS AND RISING COSTS

by Alexei Koseff

This story was originally published by CalMatters. Sign up for their newsletters.

Gov. Gavin Newsom addresses the media during a press conference unveiling his revised 2025-26 budget proposal at the Capitol Annex Swing Space in Sacramento on May 13, 2025. Photo by Fred Greaves for CalMatters

In summary

California is experiencing unexpectedly shaky economic conditions, as health care costs rise and Trump’s tariffs create ongoing uncertainty.

May 14, 2025 Gov. Gavin Newsom announced yesterday that California is facing a $12 billion budget deficit, spurred by soaring costs for social services as the state’s economy teeters from President Donald Trump’s chaotic tariffs strategy.

Unveiling his revised $322 billion spending plan, Newsom repeatedly blamed the tariffs for undermining key industries and eroding financial markets that are crucial to California’s fiscal health — a “Trump slump” that he forecasts will reduce tax revenues by billions of dollars next year.

“California is under assault, the United States of America in many respects is under assault, because we have a president that’s been reckless in terms of assaulting those growth engines and has created a climate of deep uncertainty,” Newsom said. “The impacts are being felt disproportionately in the fourth-largest economy in the world.”

But the size of Newsom’s budget proposal remains virtually unchanged from an earlier version in January, when the governor projected a modest surplus, underscoring that runaway expenses for subsidized health care and other state programs are the biggest long-term challenges.

Newsom is proposing to close the deficit by rolling back state-funded insurance coverage for adults without legal immigration status, cutting coverage for weight loss drugs like Ozempic and reducing home health services, as well as sweeping billions of dollars out of speciality funds to backfill core services.

“We’ve got a spending problem,” Newsom acknowledged, defending the potential cuts against anticipated blowback. “We can deny that we have a shortfall. We can deny that we have a deficit. We can deny we have a problem in the system and we could put it off and be irresponsible.”

His approach will force hard conversations about priorities with the state Legislature as they race to reach a budget deal before the start of the fiscal year in July. Senate President Pro Tem Mike McGuire of Santa Rosa and Senate Budget Chairperson Scott Wiener of San Francisco, both Democrats, gave only a tepid initial response, saying in a joint statement that they “remain focused and prepared to protect the people and progress we’ve made over the years.”

Bottom of Form

California’s financial picture was troubled even before the recent turmoil. Newsom and the Legislature took extraordinary steps last summer to close a budget gap projected in the tens of billions of dollars over two years, including more than $28 billion in 2025-26.

The $12 billion deficit in Newsom’s revised budget proposal represents an additional shortfall after state officials agreed last year to sweeping cuts to state agencies and positions, clawing back funding increases for health care providers, eliminating affordable housing programs, delaying money for schools, suspending business tax credits and dipping into reserves.

Newsom seeks major cuts to Medi-Cal

Medi-Cal, the state’s health insurance program for low-income people, has reported a more than $6 billion cost overrun this year — in part because an expansion to include immigrants without legal status brought in more new enrollees than expected — and it needed an emergency cash infusion in March.

That program is targeted for major reductions in Newsom’s budget proposal: a freeze on new enrollment of adults who are in the country illegally, as well as a $100 monthly premium and cuts to long-term care and dental benefits for those who maintain their coverage. The governor estimates those moves could eventually save more than $6 billion annually.

The governor is also proposing to undo a recent rule eliminating asset tests for seniors, a factor that state analysts found has contributed to a 40% growth in senior Medi-Cal enrollment over the past four years.

His plan would borrow billions of dollars from a special fund intended to raise reimbursement rates for Medi-Cal providers and shift more than $1.5 billion out of a fund intended for projects to reduce greenhouse gases to pay for the state’s firefighting operations. 

Newsom is also looking to save money by closing another state prison, a cut made possible because California’s incarcerated population has declined by nearly half, to 91,000 people, in the past two decades. It would be the fifth state prison to close during his administration, though Newsom did not specify which one.

The devastating fires that hit Los Angeles in January have introduced new uncertainty for the budget, because the tax deadline for Los Angeles County — where a quarter of all Californians live — was delayed until October.

But the most significant risk to tax receipts is undoubtedly from Trump’s tariffs. California estimates that revenues would be $16 billion higher next year if not for the president’s sweeping import duties, which Newsom sued last month to block.

Stock market declines are poised to take a bite out of future income tax revenue, because California relies disproportionately on capital gains earned by the wealthiest taxpayers; that accounts for $10 billion of the projected revenue decline. Higher costs from the tariffs are also imperiling major sectors such as manufacturing, agriculture, tourism and shipping in California, whose largest trading partner is China.

Republicans slammed Newsom for trying to foist responsibility onto Trump for a budget crisis they argue is largely a self-inflicted wound from overspending.

Sen. Roger Niello of Roseville, who serves as vice chair of the Senate budget committee, complained that Newsom “said absolutely nothing about what we need to do to close those gaps, the Gavin gaps, in the budget years after” this one, when state fiscal analysts predict California will have ongoing annual deficits of more than $20 billion.

Next step: Negotiating with lawmakers

Bargaining with legislative leaders will ramp up over the next month, with a June 15 deadline for the Legislature to pass a balanced budget or forgo its pay, though sometimes provisions of an overall deal drag out beyond that.

“Anyone who thinks we’re not going to make cuts this year is not in touch with reality,” Assemblymember Jesse Gabriel, an Encino Democrat who leads the Assembly budget committee, told CalMatters. “Advocates who are proposing major expansions of programs should stop wasting people’s time.”

California’s public universities, however, saw a rosier forecast in the budget announcement  — cuts of 3%, far below the initial 7.95% cuts Newsom proposed in January. Lawmakers this year rallied to prevent the original, deeper cuts to the University of California and California State University systems.

That still means $130 million less for UC and $144 million less for CSU, which is particularly reliant on state funding and says it faces larger class sizes, fewer course options and likely layoffs as a result.

Another spending proposal was spared: a $420 million annual increase of California’s film and television tax credit, more than doubling the pot of available subsidies and boosting the amount that individual productions can receive. It’s a priority for Newsom, with the strong backing of many Los Angeles-area legislators, especially as the region seeks a comeback after the fires.

“I want to get the economy moving again,” Newsom said. “Revenue doesn’t come from trees, it doesn’t come from printing presses.”

Trump’s effort to slash federal spending is another looming question mark. Congressional Republicans have floated shifting more of the cost of social safety net programs to the states, though they are struggling to reach a budget agreement.

If they ultimately push through major changes to federal funding, lawmakers could be back in Sacramento later this year or early next year revising the state budget once again.

“Ninety percent of the ball game is in Washington,” Gabriel said. “It’s frustrating to me that this is beyond our control.”