(The Center Square) – Republican lawmakers in California are worried that the state’s budget deficit is growing despite increasing revenues.
Legislators told The Center Square this week that concerns abound that the state’s budget deficit, despite increasing revenues, is driven in large part by increasing spending.
“We may be seeing them both grow at the same time, but we’re seeing our spending exponentially increase a whole lot faster than we’re seeing our revenues,” Assemblymember David Tangipa, R-Fresno, said late Tuesday. “We’re at record revenues in the state, and yet we still don’t have enough money to pay all of our bills. That is a great reflection that there is a spending problem in this state.”
A February report from the nonpartisan Legislative Analyst’s Office updated the state’s budget revenue outlook, projecting that the state’s multi-year structural budget deficit is now expected to sit at $35 billion annually starting in the 2027-28 budget year. The projection is fueled largely by what the office said in its report could be a revenue reversal. Such a revenue reversal would be caused by potentially declining income taxes coming to the state.
The updated budget outlook released in February is based on expected tax revenue from the state’s income, corporation and sales taxes, an LAO official said Wednesday.
“The big increases we’re seeing are being fueled by the personal income tax, which is the state’s largest revenue source,” Ann Hollingshead, the LAO’s principal fiscal and policy analyst, told The Center Square. “That is being boosted by a roaring stock market. That stock market has doubled since 2020, and that stock market growth is largely on the backs of investor enthusiasm around artificial intelligence.”
Hollingshead added that the Legislative Analyst’s Office is cautioning the Legislature about large revenue increases based on big stock market growth often don’t last and end in a bust.
“These cycles of stock market surges and busts are very common in state history, and very possible that it would happen again, and therefore there are warning signs that that history could repeat itself in the not-too-distant future,” Hollingshead told The Center Square. “If that did happen, if the stock market did reverse, that could have very significant implications for the state budget.”
The Legislative Analyst’s Office released a budget outlook report in November 2025, initially projecting the deficit could run to roughly $18 billion. The governor’s budget, released in January, projected a much smaller deficit of $2.9 billion, based on higher income tax receipts from Big Tech companies that invested in high-valuation artificial intelligence technologies.
Regardless of projected revenue increases, some lawmakers still want to see spending come down, they told The Center Square.
“We’ve got to bring spending in line with expected revenue,” Sen. Roger Niello, R-Fair Oaks, said Wednesday “The only real way to do that is to take a look at programs that have either been created or enhanced in the last four or five years and just ask if they’re accomplishing what they were supposed to.”
Niello also wants to see if the cost of certain state-run programs is sustainable given the state’s budget challenges, he added.
“That will lead us to where we need to bring spending down,” Niello told The Center Square.
Republican lawmakers also expressed concern that some of their Democratic counterparts may want to fix the deficit by raising taxes and increasing spending further.
“Right now, the LAO and the department of finance is telling us we do not have future revenues that will meet our ability to service what is already in law,” Tangipa told The Center Square. “Yet you’re seeing from the Legislature that more programs are coming. More spending is coming, and they’re warning us we cannot pay for all of these programs.”
Democratic lawmakers on tax and revenue committees in the Legislature were unavailable for comment on Wednesday. The governor’s office did not respond to The Center Square’s emails before press time on Wednesday. Officials from the California Budget and Policy Center also were also unavailable.
