Newsom betting big on AI

It’s early to think of what California’s fiscal budget may look like by the time lawmakers finalize it in June. But Gov. Gavin Newsom is already banking on the tech industry to save the state from financial distress.

When the governor unveiled his budget in January, he credited a boom in artificial intelligence for a projected three-year, $42 billion windfall. His administration is counting on that money to balance the bulk of this year’s $349 billion budget that, amid federal funding cuts, is already proposing major reductions in state spending.

But just how big is the state’s anticipated budget gap? It depends on who you ask, as the governor and Legislative Analyst’s Office have very different projections.

The former anticipates a $2.9 billion shortfall; the latter projects a deficit of $18 billion. April 15’s tax deadline will determine which is more accurate.

Newsom anticipates lowering the deficit using earnings from the state’s largest source of funding: personal income tax revenue. California has the largest share of millionaires in the country, and anyone in the state earning more than $1 million annually pays a rate of 13.3%, the highest in the nation.

AI’s significant recent growth has the bulls running wild on Wall Street. In the past few months, San Francisco-based OpenAI became the world’s most valuable company; Silicon Valley’s Nvidia is now the first publicly-traded business valued at $5 trillion; and revenue at Meta reached $201 billion in 2025.

That growth, says Department of Finance spokesperson H.D. Palmer, is generating massive income through stock options and market-related bonuses for some of California’s wealthiest residents.

“Unlike most mere mortals like you and me, who get our income from wages and salaries,” he said.

California’s tax structure is considered progressive because its highest earners pay the highest rates, which serves to protect lower earning residents from paying unfair shares of their income in taxes.

But that also makes the state more dependent on those earners than in states with a flatter taxation system.

California in fact ranks fifth nationwide in tax system volatility, and its rainy day funds are “relatively low,” according to the LAO Legislative Analyst Gabe Petek. He says both conditions are due to the boom-and-bust nature of this progressive tax system. (A 2022 report by the California Budget and Policy Center called on lawmakers to lean into the progressive model as income inequality in the state climbs. Voters could do the same, if an SEIU-backed initiative to tax billionaires makes the ballot.)

As Sen. Jacqui Irwin (D-Thousand Oaks) told Capitol Weekly, “The state budget is at the mercy of the stock market.”

Another key component of Newsom’s budget plan is to suspend constitutionally required payments to state reserves. But the state has already done that the past couple years to help balance the budget. And though revenue is growing in the state, so is spending.

“If the budget is premised on an increased revenue estimate of $42 billion,” Petek said, “that is not a time when we should be suspending making our deposits to the rainy day fund.”

Some budget experts are also growing more concerned that the state’s AI boom is a bubble that could burst in the next 18 months, leading to even greater budget holes to fill.

The LAO points to investor borrowing trends and historic household stock investments as signs of an “overly exuberant” market. These conditions ring familiar in California, harkening back to the dot-com bust of 2000.

The state’s public pension system lowered its retirement ages and boosted pensions up to 50% during the internet’s stock-market heyday. But then CalPERS investment returns suffered as websites of the era started bankrupting in 2001. The agency has largely operated on a pension deficit since.

This understandably has California budget watchers nervous, though it should be noted that opinion on the AI boom being a bubble is hardly universal.

The governor’s administration will present the Legislature with more accurate personal income tax numbers in the May revision. But waiting until then concerns some lawmakers and analysts, who say doing so could stifle public input and either rush the Legislature action or delay the budget’s completion. Former Gov. Arnold Schwarzenegger, for example, signed the 2010 state budget four months after its constitutionally required deadline — rendering much of the document’s economic analysis outdated.

“Given that a new administration will take office next year,” the LAO wrote in a response to Newsom’s budget proposal, “further delays would mean making difficult decisions during a period of transition to new leadership across the executive branch.”

 Chris Ramirez is an intern with Capitol Weekly’s Public Policy Journalism Internship program. The next round of Capitol Weekly internships will begin in June 2026. If you or someone you know is interested in an internship, please submit two writing samples, your resume and a cover letter to [email protected] by April 17, 2026.