Budget Report: California May Revise Updates

Last Thursday, Gov. Gavin Newsom released his May Revise for the 2026-27 fiscal year, presenting a markedly different fiscal outlook for the state than in January.

While the governor’s final May Revise press conference featured pointed criticism of the Trump administration, at times with tongue-in-cheek visuals that did little to quiet speculation surrounding a possible 2028 presidential bid, the central message focused on a balanced budget for California this fiscal year and beyond.

Gov. Newsom’s 2026-27 budget stands in sharp contrast to last year’s surplus-to-deficit narrative. This year’s May Revise instead reflects a deficit-to-balanced-budget outlook, closing what was projected in January as a $2.9 billion deficit and producing a balanced budget for the next two fiscal years, along with a $0 structural deficit through July 2028. This came as somewhat of a surprise as even the governor’s projected deficit in January was viewed as optimistic, particularly when compared to the Legislative Analyst’s Office (LAO) fall 2025 estimate projecting a $17.6 billion deficit.

According to Gov. Newsom, the balanced budget is driven by “California dominating revenue beyond what we had projected in January,” with revenues coming in approximately $16.5 billion above expectations. The increase is largely attributable to the state’s “Big Three” revenue sources: personal income tax, corporate tax, and sales and use tax collections. The governor acknowledged that revenue projections remain fluid but emphasized that the upward trend is evident in both the administration’s projections and the LAO’s updated revenue estimates. It is worth noting that part of the governor’s proposal to maintain this balanced budget for fiscal years to come includes $3.6 billion in revenue, which results in part a proposed expansion to the 7.25% software tax and a permanent cap on tax credits for large corporations.

Despite the stronger-than-anticipated revenue outlook, Gov. Newsom emphasized a continued focus on maintaining budget stability beyond the current fiscal year. To that end, the May Revise proposes transferring $9.7 billion into the state’s Surplus Money Investment Fund and refrains from introducing significant new expenditures, instead prioritizing the continuation of existing investments. Overall, the May Revise proposes a total budget of $349.9 billion, including $246.6 billion General Fund spending, which is $1.8 billion lower than estimated in January.

Click here for the full report.

This document is intended to provide you with general information regarding California’s budget. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.