By Yue Stella Yu and Kate Wolffe
CalMatters Writers
California lawmakers adopted a $356 billion state budget late Monday that would largely avoid or delay billions of dollars in social service cuts Gov. Gavin Newsom proposed last month.
Then, the (real) budget negotiations can begin.
The vote was only a formality, because lawmakers are constitutionally required to pass a balanced budget by June 15 each year to continue collecting their pay. They have until the end of the month to strike a deal with Newsom before the new fiscal year starts July 1.
State lawmakers agreed with Newsom’s plans to raise taxes on computer software, reduce tax credits to businesses and extend a tax on health care providers. But in the next two weeks, legislators will also have to settle their differences with Newsom on health care cuts, funding for schools and homelessness and more.
Democratic leaders on Monday deemed their legislative spending plan a fiscally sound proposal that would reduce future budget deficits while maintaining some services for low-income Californians.
“We have talked in previous years and again this year about the balance between compassion and fiscal responsibility,” said Assemblymember Jesse Gabriel, D-Encino, who chairs the Assembly budget committee, during a hearing Monday. “That is at the center of our budget conversation.”
Faced with federal funding cuts under the tax and spending law President Donald Trump signed last year, Newsom proposed several measures to limit health care coverage for undocumented immigrants as well as refugees, asylees and human trafficking survivors.
Top legislative Democrats want to delay those cuts by a year while looking for alternatives to soften the impact.
Newsom also wants to raise the monthly Medi-Cal premium undocumented immigrants pay from $30 to $50. But lawmakers prefer waiting him out, proposing to leave the decision to the next governor.
“I don’t think it’s about Gavin Newsom,” said Sen. John Laird, D-Santa Cruz, who chairs the budget committee. “It’s really about trying to stretch as far as we can in the hope that we don’t have to make those cuts.”
The Legislature rebuked Newsom’s proposal to reinstate stringent Medi-Cal asset tests for seniors and adults with disabilities by July, instead pitching a less restrictive limit to take effect in fiscal year 2027-28. With bipartisan support, the lawmakers also rejected Newsom’s proposed cuts to the In-Home Supportive Services program.
They did, however, agree to Newsom’s plan to spend $300 million to subsidize private health care for low-income Californians.
Assemblymembers on Monday night were set to approve three Newsom-backed tax measures to raise more revenues. The Senate is expected to approve them Thursday.
One measure, Senate Bill 125, would extend a tax on health care providers, which the state has relied on to qualify for more federal funding. The administration estimated in May that the renewed MCO tax would generate roughly $2 billion a year starting next year.
The state has long taxed Medi-Cal providers at a higher rate than private insurance plans to collect more federal funding, but new federal rules will end that practice. SB 125 would increase the tax on private plans to match the Medi-Cal rate, a move critics say will drive up health plan costs and hike Californians’ monthly insurance premiums.
“That cost will have to get passed along somewhere,” causing businesses to scale back health care coverage or lay off employees, said Assemblymember LaShae Sharp-Collins, D-La Mesa, during a hearing Monday. “It also means increased costs for individuals at a time where we have promised to focus on affordability.”
Senate President Pro Tem Monique Limón, D-Santa Barbara, told reporters the agreement on the tax structure reflects a compromise. Senate Democrats had rejected the plan last month, proposing instead a monthly charge on big employers for having employees enrolled in Medi-Cal. They’ve now backed away from that plan, asking the next governor to pitch “fully viable options” next year.
“We have, in this moment, to make some decisions that will generate revenue very quickly,” she said Monday.
The Assembly also approved Senate Bill 122, which includes a sales tax on most everyday software, like Slack and Microsoft Suites, starting January 2027, and a cap on tax credits big corporations claim.
California has had a business tax credit limit up to $5 million since 2024, set to expire this year. The legislative plan, which Newsom agrees with, would extend the limit through 2029, generating a total of $9 billion between now and then. Beginning 2030, the state would cap each company’s tax credit at $5 million or 70% of the business’ tax liability, whichever is greater.
Business groups and anti-tax advocates opposed the initiatives, arguing they would stifle the state’s economy.
“There’s still time to fix this and avoid making innovation and software significantly more expensive for Californians and risking future investment and job growth in the state,” Rob Gutierrez, president of the California Taxpayers Association, said in a statement.
The proposals come at a time when California voters have rejected most local tax initiatives during the June primary. But Newsom’s proposals require no voter approval — just the support of two-thirds of each legislative chamber.
Democratic lawmakers want to add 22,000 state-funded child care slots over the next few years. They also rejected Newsom’s proposed reduction of 6,800 state-supported spaces due to declining federal and state funding.
The new slots would prioritize children ages 3 and under. Advocates who applauded the proposal say it would address a gap left unfilled by Newsom’s transitional kindergarten expansion to reach 4-year-olds.
Banking on a rosier revenue forecast, state lawmakers proposed $2.7 billion more in funding for TK-12 schools and community colleges than Newsom did in May.
Schools and educators were hoping for more. They wanted the Legislature to reject Newsom’s proposal to withhold $3.9 billion in constitutionally guaranteed school money — an accounting mechanism to prevent overpaying schools in case the projected revenue doesn’t materialize.
“We demand that the Legislature and the governor follow the law, stop with the gimmicks and the shell games, and fully fund our schools,” said David Goldberg, president of the California Teachers Association.
The Legislature’s spending plan would give counties more money to step up eligibility checks for Californians applying for food stamps and health care benefits, reviews that are now required under Trump’s spending bill.
It would also allocate $125 million to help counties reestablish indigent care — a program serving low-income Californians that largely went away under Obamacare.
State lawmakers also want to set aside $900 million for the state’s homelessness fund; Newsom included just $500 million in his proposal.
“For some of the most hard-hit Californians, we know that what we do tonight is going to make a difference in them eating and them sleeping in a home,” said Assemblymember Sharon Quirk-Silva, D-Orange County.
There’s a consensus between the Legislature and the governor to raise the ceiling on the revenue the state can deposit into its rainy day fund. The question is how much. State leaders are constitutionally required to make deposits into the account each year, but the balance cannot exceed 10% of the state’s general fund tax revenue under current law.
Changing that amount would require voter approval. Lawmakers are considering placing a measure on the November ballot that would allow them to sock away more money for lean years. They have a tight deadline of June 25 to settle on what they want to put before voters.
