With AI boom support, Newsom’s final budget again sets California as Trump foil
Touting the state’s “dominance” in industry and technological innovation, Gov. Gavin Newsom said in his final budget presentation as governor that surging revenues from the artificial intelligence industry allowed him to close California’s budget deficit for the next two years.
Though revenue gains allowed Newsom to propose new investments in public education, his budget leaves open a likely legislative fight over healthcare funding for immigrants and low-income people facing new proposed eligibility requirements. Advocates said he didn’t offer nearly enough ideas to counter the gaping holes punched in social safety nets by President Donald Trump and congressional Republicans.
Newsom described his proposal as keeping a promise to not leave his successor with a yawning structural deficit after the state’s spending has ballooned during his time in office. Much of that growth comes as a result of increases in the cost of providing healthcare to people on the state’s Medi-Cal rolls, as well as statutorily-mandated growth in public school funding.
“I could’ve gotten out of here with a 12-month solution, stacked up a lot of wins, not had any of these questions about any of these cuts and then really socked it to the next administration,” Newsom said.
But any stability his budget provides in the short term could be fleeting. Should stock markets turn, the next governor could still find themselves without sufficient revenues to keep up the state’s heavy spending. On Tuesday, State Controller Malia Cohen warned that expenses are growing at a rate that could quickly become unsustainable if California’s volatile revenue streams dropped off.
Legislative fiscal analysts have cautioned the AI industry appears to be riding a stock market bubble that could burst. On the other hand, Newsom said upcoming public stock offerings for technology giants SpaceX, OpenAI and Anthropic are likely to bring California a fresh infusion of capital gains tax dollars.
For the second year in a row, Newsom used his budget presentation to position himself and the state as a foil to President Donald Trump. He described the White House as full of chaos agents and spent considerable time castigating the president for damaging the global and American economy through the war in Iran, unpredictable tariff policies and other actions.
“The work of governing is not bluster and threats on social media, but preparing for storms before they arrive,” Newsom’s letter to lawmakers said.
But the governor, who has raised his national profile by mocking Trump on social media, did use his time in front of reporters on Thursday to take a number of shots at the president, with one slide featuring a meme of Trump and U.S. Treasury Secretary Scott Bessent as Dumb and Dumber and another reimagining Trump’s controversial White House ballroom proposal with a giant Newsom portrait along one wall.
What’s new in the May Revision?
Newsom’s budget proposes reducing general fund spending by $1.8 billion to try and anticipate a downturn. And it raises some $8 billion in new revenues over the next two fiscal years by limiting corporate tax credits and imposing new fees on some corners of the healthcare and technology industries.
Alongside significant investments in public education, Newsom proposed new funds to bolster wildfire recovery and offset federal cuts to healthcare subsidies. Newsom’s budget would also require community college and K-12 schools offer 14 weeks of parental leave for employees, a significant expansion of the state’s parental leave for state employees. Newsom’s staff described the benefit as “absorbable” for schools within the growth in funding.
Newsom’s public education investments include $5 billion into a discretionary block grant program for teacher training and student support. He also proposes increasing special education funding by 43%, or $2.4 billion. There is also a $500 million investment in literacy coaches and math support staff at struggling schools.
In the Republican budget response, Senate Budget Committee Vice Chair Roger Niello, R-Fair Oaks, told reporters he didn’t believe the state’s books were balanced, facing a structural deficit that will re-emerge after 2028. That the budget will be balanced through 2028 is also a claim he takes issue with, since the state’s revenue sources are so volatile.
“This stock market looks a lot like the dot-com crash of 25 years ago,” Niello said. “Stock markets never go up forever. And the further they go up in terms of inflated values, the harder the fall. And I’m very concerned.”
Immigrant healthcare fight is coming
Newsom’s preliminary January budget proposal kicked off an uproar from lawmakers who said the governor sought to balance the budget by paring back healthcare for the state’s immigrants, including both undocumented people and those legally present in the country through humanitarian visa programs. On Thursday, he stuck to his guns on those cuts, proposing increasing new premiums for people with unsatisfactory immigration status — undocumented immigrants, DACA recipients and other visa holders — by $20.
Those premiums have been a point of friction between Newsom and lawmakers since last year. In 2025, he proposed a $100 a month premium, but lawmakers wore him down to $30. Now he is proposing a $50 premium, which his staff said would raise $427 million in the coming fiscal year but would drop to a $314 million saving the following year.
Newsom said the premiums were fair as citizens pay Medi-Cal costs that are often higher.
“None of these things I want to do. I’m just trying to find some balance here,” he said.
The governor also proposed reinstating asset test limits for Medi-Cal applicants — a move advocates say will force older adults to choose between building savings or enrolling in the healthcare program. That proposal could raise close to $500 million by the 2029 fiscal year, according to Newsom’s presentation. Those savings would come through taking people off the Medi-Cal rolls after recalculating their assets.
To counter cuts from the federal government, Newsom proposed a $300 million fund to insulate Californians from the expiration of Affordable Care Act tax subsidies spiking insurance premiums for lower income Americans.
According to a handout published Thursday morning, Newsom’s proposal “will keep $0 monthly health plans available for lower-income Californians, expand financial help so more middle- and working-class families can afford coverage, and provide new state assistance for Californians earning up to 200% of the federal poverty level.”
Groups advocating for increased healthcare access said the new program wasn’t nearly sufficient given the size of national Republicans cuts to social services and healthcare funding.
“The governor promoted California’s economic dominance while, in the same breath, making it more difficult for Californians with low incomes to access health care by reinstating harmful Medi-Cal asset limits, expanding work requirements, and increasing Medi-Cal premiums for certain immigrants,” California Budget and Policy Center Director Chris Hoene said.
The center predicted as many as 2 million Californians would lose health coverage because Newsom’s proposal does not sufficiently react to cuts from the federal government. More than 3 million households face loss of food benefit programs.
“Some of the governor’s proposed cuts would add to rather than mitigate that harm,” Hoene said.
Revenue raisers
Surprisingly, Newsom, who has sharply opposed a proposed ballot measure to tax billionaires and generally indicated an aversion to raising taxes, proposed a limit on corporate tax credits. Under his plan, California would limit some tax credits to either $5 million or 50% of a company’s tax liability, depending on which represented a higher share of the entity’s tax bill.
He also proposed a tax on certain software sales and a tax on healthcare management companies to raise a combined $2.8 billion this fiscal year and the next.
Two significant corporate tax proposals have gained momentum with lawmakers this year. One would collect billions of dollars more in revenue from multinational companies proponents say offshore much of their profits to avoid sales taxes in California. The other imposes a fee on mega corporations whose employees rely on Medi-Cal for health insurance.
Newsom is pairing his tax credit cap with a cut to fees new small businesses must pay the state, according to the handout. His budget proposal also includes a $100 million fund to provide low-interest loans for people rebuilding after wildfires when home insurance falls short.
How we got here and the Legislature’s proposals
Lawmakers began the legislative session in January with two drastically different assessments of the deficit. The Legislative Analyst’s Office predicted the state would be $18 billion short and the governor’s office predicted a $2.9 billion shortfall. The LAO expected California would experience a stock market downturn, the likes of which has not materialized, although the office continues to warn it is likely.
For weeks, state and legislative officials have highlighted surging revenues, which an LAO estimate found were $25 billion higher than what Newsom had forecasted in January.
Last month, the state Senate outlined their budget framework, which called for building up reserves and resisting the governor’s proposed cuts to some education, homelessness assistance and home health service programs. They also proposed delaying the premiums and cuts to dental programs for undocumented immigrants.
The Assembly echoed the Senate’s reluctance to make cuts to safety net programs. But it didn’t join with the Senate in their call for a “Fair Share Contribution,” a tax on large corporations that have a high proportion of workers on Medi-Cal, California’s Medicaid.
The question of how much federal assistance the Trump administration will hold back from California remains. On Wednesday, Vice President JD Vance announced the government would withhold $1.3 billion in Medicaid assistance from California due to the state not doing enough to combat fraud.
Attorney General Rob Bonta has had previous success suing to stop the Trump administration’s freezes to state funding. The attorney general did not immediately indicate whether he’d be taking the White House to court over the $1.3 billion Vance on Wednesday said the federal government would hold back.
This story was originally published May 14, 2026 at 6:01 AM with the headline "With AI boom support, Newsom’s final budget again sets California as Trump foil."
