Gov. Gavin Newsom on Monday unveiled the initial details of his $322.2 billion state budget proposal for the 2025-26 fiscal year. Based on his presentation, Californians should be worried.
He claims that his budget will promote an “efficient and leaner” government, yet his plan is neither. The Newsom budget would increase spending by around 8% year over year. When you consider inflation is now running at an annual rate of 2.5 to 3.0%, this is a huge inflation-adjusted spending increase. Spending significantly more money does not promote a leaner state government.
On efficiency, most private businesses streamline operations to produce a better product more cheaply. Not only does the budget fail the spending criteria (it is spending more), the quality of services Californians receive is also abysmal.
For instance, California continues to have the worst homeless crisis in the nation. The state has spent $24 billion trying to address the problem since 2019. Despite this spending, the problem has only worsened as the number of homeless rises every year and reached 186,000 Californians as of 2024. Showing their tone-deafness, the Newsom administration touts its creation of a new homeless spending website, but continues to double down on ineffective programs.
Then there is the proliferation of crime, which is a top concern for many voters. The state has spent an additional $1.6 billion to combat crime over the last couple of years, yet U.S. News and World Report ranks California as the 9th most dangerous state in the nation.
A similar pattern holds with respect to the problems of poverty, energy costs, and broad-based affordability. After adjusting for population, California spends significantly more than other states trying to reduce poverty and promote a more affordable cost of living for residents. But the Newsom policies furthered in his budget plan are fueling the worst outcomes in the country including the nation’s highest poverty rate (when adjusted for cost of living) or having the second highest cost of living next to Hawaii.
Despite Newsom’s rhetoric at his press conference, his budget plan is devoid of the reform that he talked about at length. Without implementing any substantive policy changes, it is inconceivable that the quality of public services that Californians receive will improve.
Making these sub-par services harder to bear, Californians pay more in taxes than residents of most other states.
Newsom may claim that the tax burden on residents of the Golden State is average, but this is patently untrue. According to Wallet Hub, hardly a right-wing outfit, California’s total tax burden is the 5th highest in the country. The state also has the highest state sales tax rate and highest top marginal income tax rates in the country.
These high tax rates have consequences. The high personal income tax rates, for instance, cause unsustainable revenue surges when the stock market has a good year. And 2024 was a good year for the markets – the NASDAQ 100 returned 27.0%. Not surprisingly, state revenues are $16.5 billion above expectations. Due to this revenue surge, the expected deficit for the 2025-26 budget is only $2 billion despite state spending being higher than expected.
The stock market does not always rise, of course. When the stock market declines, which it eventually will, state revenues will crash, setting the state up for the next budget crisis. The inevitable result will be the state’s boom-bust fiscal cycle that is unique in its severity.
Even more troubling, California’s unreasonable tax rates are chasing away those tax revenues. After all, a tech entrepreneur can enhance her potential returns by 15% by setting up shop in Austin rather than San Jose.
Focusing on the numbers, not the rhetoric, it is clear that Governor Newsom’s proposal does not promote a lean and efficient budget. It simply offers more of the same – a costly and ineffective state government. Californians deserve better.
Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.