Gov. Gavin Newsom on May 14 released a revised 2026–2027 California budget proposal that his office says eliminates the state’s projected operating deficit through July 2028.

Late last year, the state’s nonpartisan budget analyst warned that California was on track to spend about $18 billion more than it would bring in next year. Newsom says the new proposal closes that gap, largely because tax revenue came in higher than expected.

State Republicans say Newsom’s proposal is not real spending discipline—just an unexpected bump in tax revenue—and that the extra money should be returned to taxpayers.

Newsom’s plan would cut General Fund spending by $1.8 billion and deposit $9.7 billion into the state’s Surplus Holding Account, the governor’s office said. The administration also reported $16.5 billion in revenue above earlier projections and said the state maintains roughly $30 billion in combined reserves. The proposal projects no deficit for the current budget year, no deficit next year, and zero structural deficit through July 2028.

“California is proof that fiscal discipline and progressive values go hand in hand,” Newsom, a rumored 2028 presidential candidate, said in a statement. “We’re balancing the budget, eliminating the deficit, cutting spending, and building reserves—all while protecting health care, education, and essential services for Californians.”

The revised budget includes a proposed $300 million investment to keep Affordable Care Act subsidies in place after enhanced federal premium tax credits expired, a 50 percent reduction in annual LLC fees for new small businesses over the next three years, and what the governor’s office described as the largest special education investment in state history—$2.4 billion in new ongoing funding.

The plan also includes a $5 billion block grant for teacher training and other school priorities, $500 million for literacy and math support at high-need schools, and a $100 million disaster rebuilding fund for Los Angeles wildfire survivors.

The proposal would also cap certain corporate tax credits beginning in tax year 2027, limiting their use to $5 million or 50 percent of a company’s tax liability, whichever is greater.

The administration’s projections differ from the Legislative Analyst’s Office estimates released in November, which projected a roughly $18 billion gap between expected revenues and required spending for the fiscal year—about $5 billion larger than the administration had projected in June—and forecast ongoing annual shortfalls of about $35 billion starting in 2027–2028.

The nonpartisan agency advised lawmakers to address the gap through lasting spending reductions or revenue increases, writing that the state had “used most of its budget resiliency tools to address prior deficits.”

State Controller Malia M. Cohen on May 12 released the Annual Comprehensive Financial Report for the fiscal year ending June 30, 2025, an independently audited account of the state’s revenues, expenditures, and obligations. The report showed more than $595.5 billion in revenues and more than $582.5 billion in expenditures for the year, with an unmodified audit opinion.

“Before California debates the future, Californians deserve to understand the audited truth about the past,” Cohen, a Democrat, said in a statement accompanying the release. “Budgets tell Californians what leaders hope will happen. Audited financial statements tell Californians what actually occurred in ... the last fiscal year.”

Republicans criticized Newsom’s proposed budget revisions. The California Republican Party said in a post on X that Newsom “got a windfall of unexpected state income taxes” and was placing $9.7 billion of it in a rainy day fund. “Better idea: give our money back to Californians!” the party wrote.

California Assembly Republicans said in a post on X that the governor and legislative Democrats “created deficits, spent like the surplus would last forever, and now they’re blaming everyone else in the May Budget Revise. Californians are tired of the excuses.” In a separate post on X, the caucus said “Sacramento Democrats are already discussing new increases in the May Revise to cover the deficit they helped create.”

The Newsom administration framed California’s fiscal position as against federal policy. Its fact sheet described the proposal as supporting “our most vulnerable Californians” against the federal government’s “cruel assault on the state.”

The proposal now goes to the Legislature, which must pass a balanced budget by June 15.