California Governor Gavin Newsom and top Democratic legislators have reached an agreement on a $351.7 billion state budget that will be bolstered in part by a newly proposed tax on digital software sales.
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The spending plan for the fiscal year that begins July 1 is Newsom’s last as governor and comes as state finances are buoyed by an artificial intelligence boom fueled by home-state companies.
Even as California notches better-than-expected tax revenues and the spending plan balances the state’s budget through the following fiscal year, the agreement is largely void of major new spending commitments.
Appropriators are instead looking to save money in the face of significant federal funding cuts to healthcare and other services under President Donald Trump. The state is also grappling with growing costs, deficits in future years and a highly progressive tax structure that leaves its finances vulnerable in the event of a market downturn.
The plan will leave about $4.5 billion for the state’s regular reserve and a total of $35.2 billion across savings accounts. As part of the budget agreement, the legislature is placing a measure on the November ballot that would allow the state to stash away more money from spikes in revenue, such as IPOs planned by California-based OpenAI and Anthropic PBC.
The deal provides $90 million for distressed hospitals and $250 million for public hospitals. That is less than half of what the hospital systems requested in preparation for more than $3 billion in cuts annually under Trump’s landmark tax measure from 2025. Several cuts to healthcare services proposed by Newsom but opposed by legislative Democrats will be delayed under the agreement. Meanwhile, many Democrats in the state capital are hoping their party will win control of the U.S. House in November’s elections and reverse at least some of the biggest cuts to programs such as Medicaid.
“We’re protecting health care, preserving food programs, investing in housing at record levels and building reserves to fight back no matter what Trump and Republicans throw at us,” Assembly Speaker Robert Rivas, a Democrat, said in a statement.
The budget plan raises funds by extending sales taxes to prewritten software that is downloaded from the web, rather than purchased on a disc. Newsom and Democrats, who expect the plan to raise $900 million for the state and another $1.1 billion for local governments in fiscal year 2028 fiscal year and then annually thereafter, cast the change as modernizing old sales tax policies to account for consumer habits.
“Most of us don’t get prewritten software on a physical disc anymore. The whole world is past that; our tax code isn’t,” state Senator John Laird, a Democrat, said during a debate on the measure June 18.
Republicans argued the measure raises costs for businesses that rely on software ranging from basic office productivity apps to electronic medical records.
“For millions of Californians, this isn’t abstract. This impacts real people, real businesses. This tax could be the difference between making payroll and missing it,” state Senator Suzette Martinez Valladares, a Republican, said during a legislative debate on the measure.
Republicans and businesses also raised concerns about a provision of the budget deal that revamps an existing tax on health plans to comply with new federal rules by raising the levy on commercial health-insurance plans. The move will lead to higher costs for patients and employers, insurers said.
The deal extends current, temporary limits on business tax credits and establishes a permanent cap in 2030, when companies will be limited to using the greater of $5 million in credits per year or 70% of their tax liability.
The increases in revenue and additional funds for hospitals, initially proposed in May, didn’t satisfy backers of a ballot measure that would impose a one-time tax on billionaires. Despite Newsom’s efforts to negotiate a compromise, the labor union supporting the tax vowed to press ahead Thursday, as a deadline passed to withdraw the measure. The group argued the tax is the “only available option to stop a cascade of hospital and clinic closures.”
The state legislature, which is controlled by a Democratic supermajority, is likely to pass the budget package early next week.
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