Dollars & Democracy: An Introduction to California’s State Budget Process is an introductory training slide deck that breaks down how California’s state budget works. Designed to be clear, engaging, and accessible, this slide deck explains the fundamentals of the state budget, the rules that shape the process, the key decision-makers involved, and the advocacy opportunities available at each stage of the budget cycle. This training is designed for advocates, community organizers, students, journalists, and anyone looking to better understand how California’s budget decisions are made.
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Every year, California’s governor and Legislature adopt a state budget that provides a framework and funding for vital public services and systems — from child care and health care to housing and the safety net to colleges and TK-12 schools (transitional kindergarten through 12th grade).
But the state budget is about more than dollars and cents.
The budget expresses our values as well as our priorities for Californians and as a state. At its best, the budget should reflect our collective efforts to expand economic opportunities, promote well-being, and improve the lives of Californians who are denied the chance to share in our state’s wealth and who deserve the dignity and support to lead thriving lives.
State budget choices have an impact on all Californians. These decisions affect the quality of our schools and health care, the cost of a college education, families’ access to affordable child care and housing, the availability of services and financial support to help older adults age in place, and so much more.
Because the state budget touches so many services and our everyday lives, it is critical for Californians to understand and participate in the annual budget process to ensure that state leaders are making the strategic choices needed to allow every Californian — from different races, backgrounds, and places — to thrive and share in our state’s economic and social life.
This report sheds light on the state budget and the budget process with the goal of giving Californians the tools they need to effectively engage decision makers and advocate for fair and just policy choices.
Key Takeaways
The Bottom Line
The state spending plan is about more than dollars and cents.
Crafting the budget provides an opportunity for Californians to express our values and priorities as a state.
The state Constitution establishes the rules of the budget process.
Among other things, these rules allow lawmakers to approve spending with a simple majority vote, but require a two-thirds vote to increase taxes. Voters periodically revise the budget process by approving constitutional amendments.
The governor has the lead role in the budget process.
Proposing a state budget for the upcoming fiscal year gives the governor the first word in each year’s budget deliberations.
The May Revision gives the governor another opportunity to set the budget and policy agenda for the state.
Veto power generally gives the governor the last word.
The Legislature reviews and revises the governor’s proposals.
Lawmakers can alter the governor’s proposals and advance their own initiatives as they craft their version of the budget prior to negotiating an agreement with the governor.
Budget decisions are made throughout the year.
The public has various opportunities for input during the budget process.
This includes writing letters highlighting their budget priorities, providing public comment at legislative hearings, and meeting with officials from the governor’s administration as well as with legislators and members of their staff.
In short, Californians have ample opportunity to stay engaged and involved in the budget process year-round.
Key Facts About California’s State Budget
The State Budget = State Funds + Federal Funds
Three Kinds of State Funds
Three kinds of state funds account for almost two-thirds ($351.7 billion, or 65.3%) of California’s $538.9 billion budget for 2026-27, the fiscal year that began on July 1, 2026. Specifically:
General Fund — The state General Fund accounts for revenues that are not designated for a specific purpose. Most state support for education, health and human services, and state prisons comes from the General Fund.
Special Funds — Over 500 state special funds account for taxes, fees, and licenses that are designated for a specific purpose.
Bond Funds — State bond funds account for the receipt and disbursement of general obligation (GO) bond proceeds.
Federal funds comprise the rest ($187.2 billion, or 34.7%) of the state’s 2026-27 budget.
Most State General Fund and Special Fund Revenue Comes from Three Sources
California’s “big three” taxes
Most state revenue comes from California’s “Big Three” taxes. In 2026-27, General Fund and special fund revenue combined is estimated to total $328.4 billion, with more than three-quarters ($247.0 billion, or 75.3%) expected to come from the Big Three. California’s Big Three taxes are the:
Personal income tax — This is a tax on the income of California residents as well as the income of nonresidents derived from California sources. It is California’s largest source of revenue.
Sales & use tax — This is a tax on the purchase of tangible goods in California (the sales tax) or on the use of tangible goods in California that were purchased elsewhere (the use tax). Services are excluded from the sales and use tax, as are other items exempted by law, including groceries and medications. The sales and use tax is California’s second-largest source of revenue.
Corporation tax — This is a tax imposed on corporations that do business in or derive income from California, with the exception of insurance companies, which instead pay the insurance tax. The corporation tax is California’s third-largest source of revenue.
Other state revenue is estimated to make up nearly one-quarter ($81.4 billion) of total projected General Fund and special fund revenue in 2026-27. This other revenue comes from a broad range of sources, including taxes, fees, and fines.
State Funds Primarily Support Health and Human Services or Education
Under the enacted 2026-27 state budget:
3 in 4 General Fund and special fund dollars support three categories of spending:
Health and human services (41.7%),
TK-12 education (26.3%), and
Higher education (7.7%).
More than 5% of General Fund and special fund dollars go to corrections, primarily the state prison system.
The balance of these dollars supports other essential services (such as transportation and environmental protection) and institutions (such as the state’s court system).
Federal Funds Primarily Support Health and Human Services
Under the enacted 2026-27 state budget:
Four-fifths of federal dollars (80.2%) support health and human services programs.
The balance of federal dollars supports other essential services, including labor and workforce development, K-12 education, higher education, and transportation.
The State Budget Is Part of a Package of Bills
The state budget never stands alone. Instead, it moves as part of a package of legislation that typically includes two to three dozen bills, and sometimes many more — particularly in years when there is a budget shortfall and state leaders need to make multiple changes to balance the budget. In 2026, Governor Newsom signed more than 40 budget-related bills.
four kinds of budget-related bills
The budget package consists of two types of budget bills along with trailer bills and other budget-related legislation.
Budget Act — The state budget is formally known as the Budget Act. The Budget Act is the initial budget bill passed by the Legislature and signed into law by the governor. In general, budget bills:
Provide authority to spend money (“appropriations”) across an array of public services and systems for a single year.
Move through the Legislature’s budget committees on their own timeline.
Budget Bill Juniors — This is the informal term for any budget bill that amends the Budget Act, such as by increasing or reducing authorized expenditures. There is no limit on the number of Budget Bill Juniors that may be included in a budget package. This means state leaders can revise the Budget Act as many times as they wish by passing additional budget bills.
Trailer bills — The state budget package also includes trailer bills. Trailer bills generally make changes to state law related to the Budget Act and, like budget bills, move through the Legislature’s budget committees. In addition, trailer bills:
Must contain at least one appropriation and be listed in the Budget Act — a requirement that directly links trailer bills to the state budget.
Are organized by major policy areas in the budget. For example, health-related changes would be included in a “health” trailer bill, housing-related changes would be included in a “housing” trailer bill, etc.
Other budget-related bills — Other bills may be included in the budget package from time to time. These are bills that move independently of the Budget Act (and therefore are not trailer bills) but are still considered part of the state budget framework. This could include, for example, legislation to increase taxes or to place constitutional amendments before the voters as well as bills passed in a special session of the Legislature. This other budget-related legislation can move either through the Legislature’s policy committees or through budget committees.
State Budget Terms That Every Budget Advocate Should Know
Understanding budget lingo is crucial to effectively navigating California’s state budget process. This section highlights 10 key definitions drawn from the Budget Center’s glossary of state budget terms, which includes almost 100 budget-related words and phrases.
Assembly Budget Committee and Senate Budget & Fiscal Review Committee
These committees review the governor’s budget proposals and develop each house’s version of the budget prior to negotiations with the governor to decide the final budget details. Most budget committee work is done through subcommittees that focus on specific policy areas. For a description of budget subcommittees’ role, see the box below titled, What Is the Role of the Legislature’s Budget Subcommittees in the State Budget Process?
Budget Act
The Budget Act is the initial budget bill passed by the California Legislature and signed into law by the governor, after any line-item vetoes. The Budget Act can be referred to by the year in which it becomes law (“Budget Act of 2026”) or by the fiscal year to which it applies (“2026-27 Budget Act”).
Budget Bill Jr.
Budget Bill Jr. is the informal term for any budget bill that amends California’s Budget Act. Multiple Budget Bill Jrs. are sometimes described using Roman numerals (Budget Bill Jr. I, Budget Bill Jr. II, etc.).
Department of Finance (DOF)
The California Department of Finance leads the development of the governor’s budget proposals, prepares the governor’s budget documents, testifies on behalf of the governor at budget committee hearings, develops economic and demographic forecasts, and performs several other functions. The DOF’s director (Director of Finance) is the governor’s chief fiscal advisor.
Governor’s Budget Summary
The governor’s budget summary provides the governor’s economic and revenue outlook, highlights major policy initiatives in the governor’s proposed budget, and summarizes proposed expenditures through the California budget. The governor’s budget summary is released — along with the proposed budget — on or before January 10.
Governor’s Proposed Budget
The governor’s proposed budget provides the governor’s recommended spending for California’s upcoming fiscal year, estimated expenditures for the current fiscal year, and actual expenditures for the prior fiscal year. The proposed budget is released — along with the governor’s budget summary — on or before January 10.
Legislative Analyst’s Office (LAO)
The Legislative Analyst’s Office is an independent, nonpartisan office that conducts research and analysis on California state budget issues, analyzes statewide ballot measures, and provides fiscal and policy advice to the Legislature. The LAO is overseen by the Legislature’s bipartisan Joint Legislative Budget Committee.
Line-Item Veto
The line-item veto is the governor’s power to reduce or eliminate specific items of appropriation while approving other portions of a bill. This power applies to any bill that contains an appropriation, including budget bills and budget-related bills. The Legislature may override a line-item veto with a two-thirds vote of each house.
May Revision
The May Revision, released on or before May 14, updates the governor’s economic and revenue outlook for California; adjusts the governor’s proposed expenditures to reflect revised estimates and assumptions; revises, supplements, or withdraws policy initiatives that were included in the governor’s proposed budget in January; and outlines adjustments to the minimum funding guarantee for TK-14 education required by Proposition 98 (1988).
Trailer Bill
A trailer bill generally makes changes to state law needed to implement the policies assumed in the Budget Act. For example, if the Budget Act includes funding for a new program, the details of the program would be outlined in a trailer bill. Trailer bills move through the California State Assembly and Senate budget committees, with each bill addressing a specific policy area, such as health, housing, higher education, or transportation. The Department of Finance is required to post trailer bill language that is needed to implement the governor’s proposed budget by February 1.
Under rules established by Prop. 25 (2010), California trailer bills generally can be passed by a simple majority vote of each house of the Legislature and take effect immediately upon being signed by the governor. The only requirements for Prop. 25 trailer bills are that they (1) be listed in the Budget Act and (2) contain an appropriation of any amount. Still, even with Prop. 25, some types of trailer bills require a supermajority — generally two-thirds — vote of each house. This includes, for example, trailer bills that would raise taxes or amend a state law that was approved by voters through a ballot initiative. However, most trailer bills in a budget package will need only a simple majority vote to pass.
The Constitutional Framework
The State Constitution Establishes the Rules of the Budget Process
The governor and legislators craft the state’s annual spending plan according to rules outlined in the state Constitution.
California voters periodically revise these rules by approving constitutional amendments that appear on the statewide ballot.
Proposals to amend the state Constitution can be placed on the ballot through a citizens’ initiative or by the Legislature.
A constitutional amendment takes effect if approved by a simple majority of voters.
Three Key Budget Deadlines
Two in the State Constitution (January 10 and June 15), One in State Law (May 14)
The governor must propose a budget for the upcoming fiscal year on or before January 10. The budget must be balanced: Estimated revenues (as determined by the governor) must meet or exceed the governor’s proposed spending.
The governor must release the May Revision on or before May 14.
The Legislature must pass a budget bill for the upcoming fiscal year by midnight on June 15. The budget bill must be balanced: Estimated General Fund revenues (as set forth in the budget bill passed by the Legislature) must meet or exceed General Fund spending.
Prop. 25: Simple Majority Vote for Budget Bills and Trailer Bills
The budget package generally may be passed by a simple majority vote of each house of the Legislature.
Prop. 25 of 2010 allows lawmakers to pass, by a simple majority vote, budget bills as well as trailer bills that may take effect as soon as the governor signs them.
Under the rules of Prop. 25, trailer bills must (1) be listed in the Budget Act and (2) contain an appropriation of any amount.
Even with Prop. 25, some types of trailer bills that could be included in a budget package will require a supermajority — generally two-thirds — vote of each house. This includes, for example, bills that would raise taxes or amend a state law that was approved by voters via a ballot initiative. However, most trailer bills in the budget package will need only a simple majority vote to pass.
Prop. 25: Penalties for a Late Budget
Lawmakers face penalties if they fail to pass the budget bill on or before June 15.
Prop. 25 requires lawmakers to permanently forfeit both their pay and their reimbursement for travel and living expenses for each day after June 15 that the budget bill is not passed and sent to the governor.
These penalties do not apply to budget-related bills, which do not have to be passed on or before June 15.
Prop. 26: Supermajority Vote for Tax Increases
Any tax increase requires a two-thirds vote of each house of the Legislature.
Under the state Constitution, “any change in state statute which results in any taxpayer paying a higher tax” requires a two-thirds vote of each house.
This standard was imposed by Prop. 26 of 2010. This measure expanded the definition of a tax increase and thus the scope of the two-thirds vote requirement, which was originally imposed by Prop. 13 of 1978.
Prior to Prop. 26, only bills changing state taxes “for the purpose of increasing revenues” required a two-thirds vote. Bills that increased some taxes but reduced others by an equal or larger amount could be passed by a simple majority vote of each house.
Prop. 26: Supermajority Vote for Tax Increases
Prop. 26 of 2010 also expanded the definition of a tax to include some fees.
Prior to Prop. 26, lawmakers could create or increase fees by a simple majority vote. These majority-vote fees included regulatory fees intended to address health, environmental, or other problems caused by various products, such as alcohol, oil, or hazardous materials.
Prop. 26 reclassified regulatory and certain other fees as taxes. As a result, a two-thirds vote of each house of the Legislature is now required for many charges that previously were considered fees and could be passed by a simple majority vote.
Additional Supermajority Vote Requirements
The state Constitution requires a two-thirds vote of each house of the Legislature in order to:
Appropriate money from the General Fund, except for appropriations that are for public schools or that are included in budget bills or in trailer bills.
Pass bills that take effect immediately (urgency statutes), except for budget bills and trailer bills.
Place constitutional amendments or general obligation bond measures before the voters.
Override the governor’s veto of a bill or an item of appropriation.
Prop. 54: A Bill Must Be Published for At Least 72 Hours Before the Legislature Can Act on It
Prop. 54 of 2016 requires bills to be distributed to legislators and published on the Internet, in their final form, at least 72 hours before being passed by the Legislature.
This rule applies to all bills, including the budget bill and other legislation included in the budget package.
This mandatory review period can be waived for a bill if:
The governor declares an emergency in response to a disaster or extreme peril, and
Two-thirds of legislators in the house considering the bill vote to waive the review period.
Prop. 98: A Funding Guarantee for TK-12 Schools and Community Colleges
Prop. 98 of 1988 guarantees a minimum annual level of funding for TK-14 education.
The amount of the guarantee is calculated each year based on one of three tests that apply under varying fiscal and economic conditions. Two of these tests include adjustments for changes in statewide TK-12 attendance. Prop. 98 funding comes from the state General Fund and local property tax revenues.
The Legislature can suspend the guarantee for a single year by a two-thirds vote of each house and provide less funding. Following a suspension, the state must increase Prop. 98 funding over time to the level that it would have reached absent the suspension.
While the Legislature can provide more funding than Prop. 98 requires, the guarantee has generally served as a maximum funding level.
Prop. 2: Saving for a Rainy Day, Paying Down Debt
Prop. 2 of 2014 revised the rules that apply to the Budget Stabilization Account (BSA) — the state’s constitutional rainy day fund — and also established a new requirement to pay down state budgetary debt.
The state is required to set aside 1.5% of General Fund revenues each year, plus additional dollars in years when tax revenues from capital gains are particularly strong.
Until 2029-30, half of the revenues go into the BSA and the other half must be used to pay down state budgetary debt, which includes unfunded pension liabilities. Starting in 2030-31, the entire annual transfer goes into the BSA.
State policymakers may suspend or reduce the BSA deposit and withdraw funds from the reserve, but only under limited circumstances that qualify as a “budget emergency.”
Prop. 2: A Budget Reserve for TK-14 Education
Prop. 2 of 2014 also created a state budget reserve for TK-12 schools and community colleges called the Public School System Stabilization Account (PSSSA).
Deposits come from state capital gains tax revenues in years when those revenues are particularly strong.
However, various conditions must be met before these dollars could be transferred to the PSSSA. For example, transfers may occur only in so-called “Test 1” years under Prop. 98, which have been relatively rare.
Prop. 55: Potential New Funding for Medi-Cal From a Tax on the Wealthiest Californians
Prop. 55 of 2016 extends, through 2030, personal income tax rate increases on very high-income Californians and establishes a formula to boost funding for Medi-Cal, which provides health care services to Californians with low incomes.
Starting in 2018-19, General Fund revenues — including those raised by Prop. 55 — must first be used to fund (1) the annual Prop. 98 guarantee for K-12 schools and community colleges and (2) the cost of other services that were authorized as of January 1, 2016, as adjusted for population changes, federal mandates, and other factors.
If any Prop. 55 revenues remain after meeting these required expenditures, Medi-Cal would receive 50% of this excess, up to a maximum of $2 billion in any fiscal year.
Prop. 55 has not yet resulted in any additional funding for Medi-Cal.
Prop. 4: State Appropriations Limit (SAL) — A Cap on Spending
Appropriations are subject to a limit established by Prop. 4 of 1979, as modified by later initiatives. This spending cap is known as the Gann Limit.
The SAL limits the amount of state tax proceeds that can be appropriated each year. This limit is adjusted annually for changes in population and per capita personal income.
Some appropriations from tax proceeds do not count toward the limit, including debt service and spending that is needed to comply with court or federal mandates.
Revenues that exceed the SAL over a two-year period are divided equally between Prop. 98 spending and taxpayer rebates. The state last exceeded the SAL in 2020-21 (but did not do so in the prior year).
State Mandates: Pay for Them or Suspend Them
The state must pay for or suspend mandates that it imposes on local governments.
Prop. 4 of 1979 requires the state to reimburse local governments for costs related to a new program or a higher level of service that is mandated by the state.
Prop. 1A of 2004 expanded the definition of a mandate to include the transfer of financial responsibility from the state to local governments.
Prop. 1A also requires the state to suspend a mandate in any year in which local governments’ costs are not fully reimbursed.
What Do the Governor and the Legislature Do?
The governor and state legislators play key roles in the state budget process.
The Governor’s Role
California has long had an executive-centered budget process that gives significant authority and power to the governor and the Department of Finance (DOF), which leads the development of the governor’s budget proposals. The governor:
Approves, modifies, or rejects spending proposals prepared by state departments and agencies through an internal process coordinated by the DOF.
Proposes a spending plan for the state each January, which is introduced as the budget bill in the Legislature.
Updates and revises the proposed budget each May (the “May Revision”).
Signs or vetoes the bills included in the budget package.
Can veto all or part of individual appropriations (line items), but cannot increase any appropriations above the level approved by the Legislature.
The Legislature’s Role
Legislators also play a key role in the budget process by reviewing, revising, and adding to the governor’s proposals, with help from the Legislative Analyst’s Office, commonly known as the LAO. The Legislature:
Approves, modifies, or rejects the governor’s budget proposals.
Can add new spending or make other changes that substantially revise the governor’s proposals.
Needs a simple majority vote of each house to pass budget bills and most trailer bills.
Needs a two-thirds vote to pass certain other bills that may be part of the budget package, including bills that increase taxes or that propose constitutional amendments.
Needs a two-thirds vote of each house to override the governor’s veto of a bill or an appropriation.
What Is the Role of the Legislature’s Budget Subcommittees in the State Budget Process?
The work of the Assembly Budget Committee and the Senate Budget and Fiscal Review Committee largely happens through subcommittees. Each subcommittee — seven in the Assembly and five in the Senate — focuses on a specific policy area or set of policy areas, like health, housing, or education.
Budget subcommittees have a number of roles in the state budget process. For example, they:
Hold dozens of hearings from February to May to review the governor’s proposals, which they can approve, modify, or reject.
Meet with policy advocates to understand their priorities and gather intel on what’s happening in a specific policy space.
Evaluate budget requests (or “asks”) submitted by advocates and legislators and decide which to include in their own budget plans that they work on throughout the spring.
Finalize the Assembly and Senate versions of the budget, which are later combined into a unified legislative budget plan that is typically unveiled in late May or early June.
What Happens When?
The state budget process is cyclical, with no clear stop and start dates. State leaders develop and revise the budget during three distinct periods: July to December, January to mid-May, and mid-May to June. The following sections highlight major budget-related events and activities during each of these periods.
July to December
Work on the state budget during July to December is focused on two areas: 1) revising the June budget package (that is, the budget-related bills signed into law by the governor early in the summer), and 2) preparing for the next state fiscal year.
The Department of Finance publishes a summary of the June budget package (budget bills and trailer bills) as signed into law by the governor. This summary is sometimes published before July 1, the first day of the new fiscal year, but may be published in July.
The Legislature breaks for a one-month summer recess starting around July 4 in election years and around mid-July in non-election years.
The Legislature reconvenes in August for the final few weeks of session, which ends in August in election years and in September in non-election years.
In August, state leaders typically advance changes to the state budget package adopted in June, including at least one Budget Bill Jr. along with additional trailer bills. These changes include budget “clean-up,” such as correcting errors, as well as substantive revisions to spending and policy.
The Assembly and Senate publish summaries of the budget revisions as agreed to with the governor.
Each house’s budget committee holds at least one hearing on the budget revisions before sending the package to the Assembly and Senate floors for final votes.
The governor signs the budget revisions into law in September — or sometimes October in non-election years — possibly with line-item vetoes.
Preparing for the Next State Fiscal Year
Through a months-long process led by the Department of Finance (DOF), state agencies and departments begin preparing the governor’s proposed budget for release by January 10. All of this work happens behind the scenes within the governor’s administration.
As part of this process within the governor’s administration:
Agencies and departments develop baseline budgets to maintain existing service levels in the upcoming fiscal year and may also prepare budget change proposals intended to alter service levels.
The governor makes final decisions on what to include in the budget and what to leave out, and the DOF prepares the proposed budget for release by January 10.
Independent of the governor, legislative leaders begin to develop their own budget priorities for the upcoming fiscal year. They may publish “budget blueprints” reflecting these priorities on the Assembly and Senate websites in the fall.
In mid-November, the Legislative Analyst’s Office releases their Fiscal Outlook, providing their assessment of revenues, spending, and the state’s overall budget condition across several fiscal years.
January to Mid-May
The release of the governor’s proposed budget is the signature event of this period. The Legislature convenes dozens of public hearings to review the governor’s plan.
The governor releases the proposed budget for the upcoming fiscal year that begins on July 1.
By Mid-January
The Legislative Analyst’s Office (LAO) releases their initial overview and assessment of the governor’s proposed budget for the upcoming fiscal year. LAO releases additional, in-depth analyses of budget-related issues in the weeks and months that follow.
By Late January
The Assembly Budget Committee and the Senate Budget and Fiscal Review Committee convene overview hearings on the governor’s proposed budget.
February to Early May
Budget subcommittees in each house convene dozens of hearings to review the governor’s proposals in depth.
Mid-May to June
The unveiling of the governor’s revised budget (the May Revision) kicks off this period, which also includes the release of the joint Assembly-Senate budget plan and the announcement of a three-way budget deal between the governor and legislative leaders.
The governor releases a revised budget — the May Revision — for the upcoming fiscal year that begins on July 1.
A Few Days After the May Revision
The Legislative Analyst’s Office releases their overview and assessment of the May Revision, and later publishes an updated revenue forecast and multiyear budget outlook.
Assembly and Senate budget subcommittees convene public hearings to review the governor’s May Revision proposals. Each subcommittee holds at least one hearing.
Late May to Early June
The Assembly and Senate publish summaries — “subcommittee reports” — of their versions of the budget package.
Assembly and Senate leaders negotiate a joint legislative version of the budget package. Once there’s a “two-way” legislative deal on the budget (between the majority leadership in each house), the two houses publish summaries of the agreement. They also draft the initial budget bill, known as the Budget Act. Finalizing the roughly 1,000-page Budget Act for floor votes can take more than a week.
A full deal with the governor at this stage is possible, but rare. Nonetheless, the Legislature’s budget package will reflect many points of agreement with the governor based on ongoing, behind-the-scenes negotiations between the governor and legislative leaders.
Historical note: For many years, legislative leaders would convene a conference committee made up of Democrats and Republicans to resolve differences between the two houses’ spending plans. A conference committee has not been convened since 2019.
The Assembly and Senate must pass the Budget Act by June 15. This means the bill must be published in its final form on the California Legislative Information website by June 12 to meet the 72-hour bill-in-print requirement.
By June 15
The Legislature passes the Budget Act by June 15 — the constitutional deadline — and sends it to the governor.
If the two houses have scheduled floor votes for June 15, the Budget Act must be published in its final form on the California Legislative Information website by June 12 to meet the 72-hour bill-in-print requirement.
If the Legislature schedules floor votes before June 15, the Budget Act must be in print prior to June 12 to comply with the 72-hour rule — for example, by June 10 for floor votes on June 13.
Trailer bills are also part of the state budget package. However, trailer bills do not have to be passed by June 15. Trailer bills generally make statutory changes needed to implement the policies assumed in the Budget Act.
Second Half of June
The governor and legislative leaders continue negotiating in order to reach a “three-way” (or “Big 3”) deal on the budget package for the upcoming fiscal year.
Once a deal is reached, the rest of the bills in the budget package are unveiled, consisting of multiple trailer bills along with at least one “Budget Bill Jr.” Budget Bill Jrs. amend the Budget Act as passed by the Legislature in order to reflect the changes required by the deal with the governor.
The Assembly and Senate publish summaries of the “Big 3” budget deal agreed to with the governor, and then the Legislature passes the full package of bills.
The governor signs the Budget Act, one or more Budget Bill Jrs., and the trailer bills (some trailer bills might not be signed until July).
Bills must be signed within 12 days of being presented to the governor. However, if the 12th day is a Saturday, a Sunday, or a holiday, the period is extended to the next day that is not a Saturday, a Sunday, or a holiday.
The governor may reduce or eliminate any item of appropriation in any bill (the “line-item veto”).
How Can Californians Participate in the State Budget Process?
Californians can inform and influence budget choices by engaging with legislators and their staff as well as with executive branch officials.
Building Relationships Is Key to Effective Advocacy
Building relationships with policymakers and staffers in the Legislature and in the governor’s administration is the foundation of effective budget advocacy.
The Capitol runs on relationships: Who you know is critical to advancing your budget priorities, so it’s important to lay the groundwork for influence by building familiarity and trust with key players in the process by reaching out and scheduling a time to meet in person or virtually. Autumn can be the best time to reach out because workloads tend to be lighter, but it’s never too late to start.
Because turnover can be high in the Legislature and in the governor’s administration, it’s important to pay constant attention to relationship-building. There are always new faces to become acquainted with, so the work of relationship-building never ends.
Californians Have Many Ways to Make Their Voices Heard
With relationships as a foundation, there are a range of tactics that advocates can use to ensure that their voices are heard in the state budget process. For example, you can:
Submit “budget letters” to policymakers outlining your budget priorities.
The public’s role includes writing letters that highlight your budget priorities and providing them to legislators and the governor’s administration.
While it’s acceptable to send information directly to budget committee consultants’ work emails, advocates should use this option prudently given the high volume of emails that committee consultants receive.
However, advocates should never send “spam” emails directly to budget committee consultants. These are email templates that hundreds or thousands of people can use to send the same message to policymakers and staff. Those kinds of emails should go to the dedicated budget committee email addresses instead.
Schedule meetings with key policymakers and staff in the Legislature and in the governor’s administration.
Building relationships is crucial to effective advocacy, so it’s important to lay the groundwork for influence by reaching out and scheduling times to meet with key legislators and their staff — particularly on the budget committees and in leadership positions — as well as with key contacts in the governor’s administration.
Provide public comments and — if invited — testify as part of a panel at budget subcommittee hearings.
You can share your views during public comment periods at budget subcommittee hearings.
Committee chairs set time limits for each public comment. Sometimes the limit is 1 minute, but it’s often shorter and may only include enough time for you to deliver a “me too” comment — name, organization, and position on the issue.
In addition, when invited by committee staff, you can provide testimony at a budget subcommittee hearing, which provides more time to share expertise on an issue as well as personal stories, which can be very impactful.
Participate in “lobby days” at the Capitol, joining forces with a broad range of advocates.
Lobby days can be impactful — these events bring together hundreds or even thousands of advocates who join forces to focus media and policymakers’ attention on key policy issues, including those affecting health, child care, economic security, and housing.
Advocacy Opportunities During Each Phase of the State Budget Process
Californians can press for their budget priorities throughout the year. This section outlines what you can do during each phase of the state budget process: July to December, January to mid-May, and mid-May to June.
Advocacy Opportunities: July to December
quick take: quietest period of the state budget process
Much happens behind the scenes from July to December, particularly in the governor’s administration, but advocates still have opportunities to make their voices heard
Watch for budget developments in August that affect the issues you work on and be prepared to weigh in on any new proposals.
Schedule introductory meetings with staffers in the Legislature and in the governor’s administration who will be helpful to know for your advocacy.
For the Legislature, check the Assembly and Senate websites to see which budget committee consultants focus on your issues and get their email addresses.
For the governor’s administration, start with organizational charts that show who works in the Governor’s Office (the governor’s “inner circle” of advisers) and in key positions in the state departments and agencies. For contacts in the Department of Finance, see this chart of responsibilities.
Share your budget priorities with:
Key contacts in the Governor’s Office and in state departments, asking for your priorities to be included in the governor’s January 10 budget proposal.
Budget committee consultants as well as staff who work for legislative leadership (Assembly Speaker and the Senate President pro Tem).
Advocacy Opportunities: January to Mid-May
quick take: heart of the budget process
January to mid-May is the period with the most consistent and transparent opportunities for public engagement.
Write letters outlining your priorities, including weighing in on the governor’s January proposed budget. Deliver budget letters to the Assembly and Senate budget committee members and staff, legislative leadership, and the Governor’s Office.
Meet with contacts in the Governor’s Office and state departments to discuss the January proposed budget’s approach to education funding and policy and share your ideas for how to improve the governor’s proposals in the May Revision.
Look for opportunities to meet with key contacts in the Legislature to share your priorities and perspectives, including key staff and the chairs of the budget subcommittees.
Draw attention to your issues by:
Taking advantage of public comment periods during budget hearings,
Focusing on storytelling (including highlighting real-world impacts of policy actions/inaction), and
Organizing public actions to raise awareness and garner local and statewide media coverage.
Advocacy Opportunities: Mid-May to June
quick take: fastest-moving period of the budget process
The quick pace during the mid-May to June period can make advocacy challenging as policymakers make major decisions in a short period of time.
Share your views on the May Revision (the governor’s revised budget) during the public comment periods at budget subcommittee hearings.
Urge key legislative staff and members to include your budget priorities in the joint Assembly-Senate budget plan — assuming your idea hasn’t already been embraced by either house or by the governor.
If the Legislature adopts your idea but the governor’s position is questionable or negative, look for ways to move the governor to yes. This could include bringing grassroots pressure to bear, publishing op-eds in key media outlets, and garnering favorable media attention for your cause.
Legislative Counsel: Bills and bill analyses, a free bill-tracking service, the state codes, and the state Constitution.
State Assembly and Senate: Committee agendas and other publications, floor session and committee schedules, the annual legislative calendar, and live and archived video streaming of legislative proceedings.
Last week, the Legislature passed 16 bills that adjust the spending and policies in the 2026-27 budget package, which Governor Newsom signed into law earlier this summer. The new budget-related legislation passed last week includes: These bills next go to Governor Newsom’s desk. The governor is expected to sign them all — the final budget-related … Continued
Every year, California’s governor and Legislature adopt a state budget that provides a framework and funding for vital public services and systems — from child care and health care to housing and the safety net to colleges and TK-12 schools (transitional kindergarten through 12th grade).
But the state budget is about more than dollars and cents.
The budget expresses our values as Californians and as a state. At its best, the budget should reflect our collective efforts to expand economic opportunities, promote well-being, and improve the lives of Californians who are denied the chance to share in our state’s wealth and who deserve the dignity and support to lead thriving lives.
State budget choices impact all Californians, including the 5.7 million students in California’s TK-12 public schools. The state budget provides most of the funding for TK-12 education, which includes more than 1,000 school districts, county offices of education, and charter schools.
While the total size of the state budget helps to determine the amount of annual funding TK-12 schools receive, the Legislature and governor decide how these state funds are allocated across the state. Therefore, it’s important for Californians to participate in the annual budget process to ensure that state leaders are making the strategic choices needed to allow every TK-12 student — from different races, backgrounds, and places — to thrive and share in our state’s economic and social life.
Understanding the financial resources available to TK-12 schools requires familiarity with the state budget, school funding, and the state budget process. To this end, this guide:
Highlights key school funding sources,
Puts school funding into the larger state budget context,
Describes key components of the state budget process, and
Shows how Californians can work to shape the state’s TK-12 funding decisions.
The goal is to provide Californians with the tools they need to effectively engage decision makers and advocate for fair and just TK-12 funding and policy choices.
Key Takeaways
The state spending plan is about more than dollars and cents.
The state budget process allows Californians to express our values and priorities for our state as well as for California’s TK-12 system, which educates well over 5 million students from transitional kindergarten through 12th grade.
State dollars are the primary source of funding for California’s TK-12 schools.
TK-12 education receives the second-largest share of General Fund dollars, after health and human services.
The state distributes school funding in multiple ways, including through a formula as well as through additional programs targeting students’ specific needs.
The governor has the lead role in the budget process.
Proposing a state budget for the upcoming fiscal year gives the governor the first word in each year’s budget deliberations.
The May Revision gives the governor another opportunity to set the budget and policy agenda for the state.
Veto power generally gives the governor the last word in budget decisions.
The Legislature reviews and revises the governor’s proposals.
Lawmakers both build on and revise the governor’s proposals as they craft their version of the state budget prior to negotiating an agreement with the governor.
Budget decisions are made throughout the year, and TK-12 education advocates have many ways and opportunities to make their voices heard.
Every year, advocates have multiple opportunities to build relationships with policymakers and staffers and work to influence budget decisions.
This includes submitting letters to policymakers outlining key budget priorities, providing public comment at budget committee hearings, and meeting with committee staffers, legislators, and officials in the governor’s administration.
In short, TK-12 advocates have ample opportunity to stay engaged and involved in the budget process year-round.
Understanding the California State Budget
California’s state budget funds a wide range of public services, from schools to health care to higher education. Understanding where the dollars come from and how they are allocated is essential context for understanding how schools are funded.
the state budget consists of three types of state funds
Three kinds of state funds account for almost two-thirds (65.3%) of California’s $538.9 billion budget for 2026-27, the fiscal year that began on July 1, 2026. Specifically:
General Fund — The state General Fund accounts for revenues that are not designated for a specific purpose. Most state support for education, health and human services, and state prisons comes from the General Fund.
Special Funds — Over 500 state special funds account for taxes, fees, and licenses that are designated for a specific purpose.
Bond Funds — State bond funds account for the receipt and disbursement of general obligation (GO) bond proceeds.
Federal funds comprise the rest (34.7%) of the state’s 2026-27 budget.
Most General Fund Revenue Comes from Three State Taxes
Under the enacted 2026-27 state budget, General Fund revenue is estimated to total $230.3 billion, with more than 98% expected to come from California’s “Big Three” taxes:
Personal income tax(63.2%) — This is a tax on the income of California residents as well as the income of nonresidents derived from California sources.
Corporation tax(19.6%) — This is a tax imposed on corporations that do business in or derive income from California, with the exception of insurance companies, which instead pay the insurance tax.
Sales & use tax(15.5%) — This is a tax on the purchase of tangible goods in California (the sales tax) or on the use of tangible goods in California that were purchased elsewhere (the use tax).
Other state revenue is estimated to make up about 2% of total projected General Fund revenue in 2026-27. This revenue comes from a broad range of sources, including taxes, fees, and fines.
More Than a Third of State General Fund Spending Supports TK-12 Education
Under the enacted 2026-27 state budget:
TK-12 education accounts for more than a third (36.2%) of General Fund spending.
The largest share (37.1%) of General Fund spending supports health and human services.
About 1 out of every 10 General Fund dollars (10.6%) funds higher education, which includes the California Community Colleges, the California State University, and the University of California.
Understanding TK-12 Education Funding
California’s TK-12 schools are funded primarily through Proposition 98 (see box below), a constitutional funding guarantee that sets a minimum funding level for the state’s public schools and community colleges each year. This section explains where funding for TK-12 education comes from and how it is distributed to schools across the state.
what is proposition 98?
Prop. 98 is a constitutional amendment adopted by California voters in 1988 that establishes an annual minimum funding level for schools each fiscal year, commonly referred to as the minimum guarantee. Prop. 98 funding comes from a combination of state General Fund revenue and local property taxes. Prop. 98 spending supports TK-12 schools, community colleges, county offices of education, the state preschool program, and state agencies that provide direct TK-14 instructional programs. While Prop. 98 establishes a required minimum funding level for programs falling under the guarantee as a whole, it does not protect individual programs from spending cuts or elimination.
The Majority of TK-12 Education Funding Comes from the State
In the 2024-25 fiscal year, TK-12 school districts (excluding charter schools) and county offices of education received funding from a broad range of sources, with state funds making up the largest share. Specifically:
Almost 60% ($63.8 billion) came from the state.
Over a third came from local sources, including 25.6% ($27.9 billion) from local property taxes and 10.2% ($11.1 billion) from other local revenues such as parcel taxes and fees for the use of school buildings.
Nearly 6% ($6.4 billion) came from the federal government through a number of federal programs.
Most TK-12 Education Funding Is Allocated Through the Local Control Funding Formula
In the 2024-25 fiscal year, schools received $72.3 billion through the Local Control Funding Formula (LCFF), the primary funding mechanism for TK-12 school districts, charter schools, and county offices of education. This formula:
Is funded through a combination of General Fund and local property taxes.
Primarily uses an attendance measure, average daily attendance (ADA), to calculate a funding allocation for each district, charter school, or county office of education.
Sets a per-ADA base grant, which is adjusted by grade level spans (TK-3, 4-6, 7-8, 9-12). The base grants are also annually adjusted for increases in the cost of living.
Includes additional grants to more equitably distribute LCFF dollars across schools. These grants are based on a school district’s enrollment of students in the foster system, students identified as English learners, students from families with low incomes, or students experiencing homelessness.
Mechanically generates funding amounts, but the governor and the Legislature ultimately determine LCFF allocations in the annual state budget by approving any growth in cost of living or other changes that impact funding.
The formula also provides a greater level of local autonomy in TK-12 spending decisions compared to the previous school finance system, which the LCFF replaced in 2013-14. However, TK-12 districts must demonstrate how spending decisions increase or improve services to students with the highest needs.
Schools Also Receive Funding Through Categorical Programs
In addition to LCFF dollars, schools also receive funding through a growing number of categorical programs. Unlike discretionary funding provided through the LCFF, categorical programs fund specific purposes. Each program has its own allocation formulas that differ from the LCFF; therefore, the amounts schools receive vary by program.
As of the 2025-26 state budget, the largest categorical programs were Special Education, the Expanded Learning Opportunities Program, Child Nutrition, State Preschool, and Arts and Music funding (Proposition 28 of 2022).
As with the LCFF, the governor and the Legislature decide each year whether to create categorical programs and increase or decrease funding for existing ones. In recent years, programs such as the Expanded Learning Opportunities Program have been created, directing Prop. 98 dollars to schools earmarked for that specific purpose. Creating new categorical programs comes with a trade-off: more money directed to categoricals means less is available to expand LCFF funding, which gives districts more spending flexibility.
State Budget Process: Terms Every TK-12 Advocate Should Know
Understanding key budget-related terms will help advocates more effectively navigate the state budget process. This section features a dozen definitions drawn from the Budget Center’s glossary of state budget terms, which includes around 100 budget-related words and phrases.
Assembly Budget Committee + Senate Budget and Fiscal Review Committee
These committees review the governor’s budget proposals and develop each house’s version of the budget prior to negotiations with the governor to decide the final budget details. Most budget committee work is done through subcommittees that focus on specific policy areas. For a description of budget subcommittees’ role, see the box below titled, What Is the Role of the Legislature’s Budget Subcommittees in the State Budget Process?
Budget Act
The Budget Act is the initial budget bill passed by the California Legislature and signed into law by the governor, after any line-item vetoes. The Budget Act can be referred to by the year in which it becomes law (“Budget Act of 2026”) or by the fiscal year to which it applies (“2026-27 Budget Act”).
Budget Bill Jr.
Budget Bill Jr. is the informal term for any budget bill that amends California’s Budget Act. Multiple Budget Bill Jrs. are sometimes described using Roman numerals (Budget Bill Jr. I, Budget Bill Jr. II, etc.).
Department of Finance (DOF)
The California Department of Finance leads the development of the governor’s budget proposals, prepares the governor’s budget documents, testifies on behalf of the governor at budget committee hearings, develops economic and demographic forecasts, and performs several other functions. The DOF’s director (Director of Finance) is the governor’s chief fiscal advisor.
Governor’s Budget Summary
The governor’s budget summary provides the governor’s economic and revenue outlook, highlights major policy initiatives in the governor’s proposed budget, and summarizes proposed expenditures through the California budget. The governor’s budget summary is released — along with the proposed budget — on or before January 10.
Governor’s Proposed Budget
The governor’s proposed budget provides the governor’s recommended spending for California’s upcoming fiscal year, estimated expenditures for the current fiscal year, and actual expenditures for the prior fiscal year. The proposed budget is released — along with the governor’s budget summary — on or before January 10.
Legislative Analyst’s Office (LAO)
The Legislative Analyst’s Office is an independent, nonpartisan office that conducts research and analysis on California state budget issues, analyzes statewide ballot measures, and provides fiscal and policy advice to the Legislature. The LAO is overseen by the Legislature’s bipartisan Joint Legislative Budget Committee.
Line-Item Veto
The line-item veto is the California governor’s power to reduce or eliminate specific items of appropriation while approving other portions of a bill. The governor must offer reasons for any items that are reduced or eliminated. The Legislature may override a line-item veto with a two-thirds vote of each house.
May Revision
The May Revision, released on or before May 14, updates the governor’s economic and revenue outlook for California; adjusts the governor’s proposed expenditures to reflect revised estimates and assumptions; revises, supplements, or withdraws policy initiatives that were included in the governor’s proposed budget in January; and outlines adjustments to the minimum funding guarantee for K-14 education required by Proposition 98 (1988).
Proposition 98 (1988)
Proposition 98, a statewide ballot measure passed by voters in 1988, guarantees a minimum annual level of funding for California’s TK-12 schools and community colleges. The amount of the guarantee is calculated each year using one of three tests that apply under varying fiscal and economic conditions. Two of these tests include adjustments for changes in statewide TK-12 attendance. Prop. 98 funding comes from the state General Fund as well as from local property tax dollars.
Public School System Stabilization Account (PSSSA)
The Public School System Stabilization Account is a state budget reserve for California’s TK-12 schools and community colleges. Deposits into and withdrawals from the PSSSA are based on rules added to the state Constitution by Proposition 2 (2014).
Trailer Bill
A trailer bill generally makes changes to state law needed to implement the policies assumed in the Budget Act. For example, if the Budget Act includes funding for a new program, the details of the program would be outlined in a trailer bill. Trailer bills move through the California State Assembly and Senate budget committees, with each bill addressing a specific policy area, such as health, housing, higher education, or transportation. The Department of Finance is required to post trailer bill language that is needed to implement the governor’s proposed budget by February 1.
Under rules established by Proposition 25 (2010), California trailer bills generally can be passed by a simple majority vote of each house of the Legislature and take effect immediately upon being signed by the governor. The only requirements for Prop. 25 trailer bills are that they (1) be listed in the Budget Act and (2) contain an appropriation of any amount. Still, even with Prop. 25, some types of trailer bills require a supermajority — generally two-thirds — vote of each house. This includes, for example, trailer bills that would raise taxes or amend a state law that was approved by voters through a ballot initiative. However, most trailer bills in a budget package will need only a simple majority vote to pass.
State Budget Process: Three Key Deadlines
There are three key budget-related deadlines. Two of these deadlines are included in the state Constitution, and the third is outlined in state law.
January 10: The constitutional deadline for the governor to propose a state budget for the upcoming fiscal year.
May 14: The statutory deadline for the governor to release a revised budget, known as the “May Revision” or “May Revise.” The revised budget updates the governor’s January revenue estimates and spending proposals.
June 15: The constitutional deadline for the Legislature to pass the initial budget bill for the upcoming fiscal year. This is the bill that becomes the Budget Act once the governor signs it into law.
Three Key Budget Deadlines
Two in the State Constitution (January 10 and June 15), One in State Law (May 14)
The governor must propose a budget for the upcoming fiscal year on or before January 10. The budget must be balanced: Estimated revenues (as determined by the governor) must meet or exceed the governor’s proposed spending.
The governor must release the May Revision on or before May 14.
The Legislature must pass a budget bill for the upcoming fiscal year by midnight on June 15. The budget bill must be balanced: Estimated General Fund revenues (as set forth in the budget bill passed by the Legislature) must meet or exceed General Fund spending.
State Budget Process: What Do the Governor and the Legislature Do?
The governor and state legislators play key roles in the state budget process.
The Governor’s Role
California has long had an executive-centered budget process that gives significant authority and power to the governor and the Department of Finance, which leads the development of the governor’s budget proposals. The governor:
Approves, modifies, or rejects spending proposals prepared by state departments and agencies through an internal process coordinated by the Department of Finance.
Proposes a spending plan for the state each January, which is introduced as the budget bill in the Legislature.
Updates and revises the proposed budget each May (the “May Revision”).
Signs or vetoes the bills included in the budget package.
Can veto all or part of individual appropriations (line items), but cannot increase any appropriations above the level approved by the Legislature.
The Legislature’s Role
Legislators also play a key role in the budget process by reviewing, revising, and adding to the governor’s proposals, with help from the Legislative Analyst’s Office, commonly known as the LAO. The Legislature:
Approves, modifies, or rejects the governor’s budget proposals.
Can add new spending or make other changes that substantially revise the governor’s proposals.
Needs a simple majority vote of each house to pass budget bills and most trailer bills.
Needs a two-thirds vote to pass certain other bills that may be part of the budget package, including bills that increase taxes or that propose constitutional amendments.
Needs a two-thirds vote of each house to override the governor’s veto of a bill or an appropriation.
What Is the Role of the Legislature’s Budget Subcommittees in the State Budget Process?
The work of the Assembly Budget Committee and the Senate Budget and Fiscal Review Committee largely happens through subcommittees. Each subcommittee — seven in the Assembly and five in the Senate — focuses on a specific policy area or set of policy areas, like health, housing, or education.
The education-related budget is overseen by these two subcommittees:
Senate Budget Subcommittee 1 on Education (known as “Sub 1”), and
Assembly Budget Subcommittee 3 on Education Finance (known as “Sub 3”).
Budget subcommittees have a number of roles in the state budget process. For example, they:
Hold dozens of hearings from February to May to review the governor’s proposals, which they can approve, modify, or reject.
Meet with policy advocates to understand their priorities and gather intel on what’s happening in a specific policy space.
Evaluate budget requests (or “asks”) submitted by advocates and legislators and decide which to include in their own budget plans that they work on throughout the spring.
Finalize the Assembly and Senate versions of the budget, which are later combined into a unified legislative budget plan that is typically unveiled in late May or early June.
State Budget Process: What Happens When?
The state budget process is cyclical, with no clear stop and start dates. State leaders develop and revise the budget during three distinct periods: July to December, January to mid-May, and mid-May to June. The following sections highlight major budget-related events and activities during each of these periods.
July to December
Work on the state budget during July to December is focused on two areas: 1) revising the June budget package (that is, the budget-related bills signed into law by the governor early in the summer), and 2) preparing for the next state fiscal year.
The Department of Finance publishes a summary of the June budget package (budget bills and trailer bills) as signed into law by the governor. This summary is sometimes published before July 1, the first day of the new fiscal year, but may be published in July.
The Legislature breaks for a one-month summer recess starting around July 4 in election years and around mid-July in non-election years.
The Legislature reconvenes in August for the final few weeks of session, which ends in August in election years and in September in non-election years.
In August, state leaders typically advance changes to the state budget package adopted in June, including at least one Budget Bill Jr. along with additional trailer bills. These changes include budget “clean-up,” such as correcting errors, as well as substantive revisions to spending and policy.
The Assembly and Senate publish summaries of the budget revisions as agreed to with the governor.
Each house’s budget committee holds at least one hearing on the budget revisions before sending the package to the Assembly and Senate floors for final votes.
The governor signs the budget revisions into law in September — or sometimes October in non-election years — possibly with line-item vetoes.
Preparing for the Next State Fiscal Year
Through a months-long process led by the Department of Finance (DOF), state agencies and departments begin preparing the governor’s proposed budget for release by January 10. All of this work happens behind the scenes within the governor’s administration.
As part of this process within the governor’s administration:
Agencies and departments develop baseline budgets to maintain existing service levels in the upcoming fiscal year and may also prepare budget change proposals intended to alter service levels.
The governor makes final decisions on what to include in the budget and what to leave out, and the DOF prepares the proposed budget for release by January 10.
Independent of the governor, legislative leaders begin to develop their own budget priorities for the upcoming fiscal year. They may publish “budget blueprints” reflecting these priorities on the Assembly and Senate websites in the fall.
In mid-November, the Legislative Analyst’s Office releases their Fiscal Outlook, providing their assessment of revenues, spending, and the state’s overall budget condition across several fiscal years.
The governor releases the proposed budget for the upcoming fiscal year that begins on July 1.
By Mid-January
The Legislative Analyst’s Office (LAO) releases their initial overview and assessment of the governor’s proposed budget for the upcoming fiscal year. LAO releases additional, in-depth analyses of budget-related issues in the weeks and months that follow.
By Late January
The Assembly Budget Committee and the Senate Budget and Fiscal Review Committee convene overview hearings on the governor’s proposed budget.
February to Early May
Budget subcommittees in each house convene dozens of hearings to review the governor’s proposals in depth.
The governor releases a revised budget — the May Revision — for the upcoming fiscal year that begins on July 1.
A Few Days After the May Revision
The Legislative Analyst’s Office releases their overview and assessment of the May Revision, and later publishes an updated revenue forecast and multiyear budget outlook.
Assembly and Senate budget subcommittees convene public hearings to review the governor’s May Revision proposals. Each subcommittee holds at least one hearing.
Late May to Early June
The Assembly and Senate publish summaries — “subcommittee reports” — of their versions of the budget package.
Assembly and Senate leaders negotiate a joint legislative version of the budget package. Once there’s a “two-way” legislative deal on the budget (between the majority leadership in each house), the two houses publish summaries of the agreement. They also draft the initial budget bill, known as the Budget Act. Finalizing the roughly 1,000-page Budget Act for floor votes can take more than a week.
A full deal with the governor at this stage is possible, but rare. Nonetheless, the Legislature’s budget package will reflect many points of agreement with the governor based on ongoing, behind-the-scenes negotiations between the governor and legislative leaders.
Historical note: For many years, legislative leaders would convene a conference committee made up of Democrats and Republicans to resolve differences between the two houses’ spending plans. A conference committee has not been convened since 2019.
The Assembly and Senate must pass the Budget Act by June 15. This means the bill must be published in its final form on the California Legislative Information website by June 12 to meet the 72-hour bill-in-print requirement.
By June 15
The Legislature passes the Budget Act by June 15 — the constitutional deadline — and sends it to the governor.
If the two houses have scheduled floor votes for June 15, the Budget Act must be published in its final form on the California Legislative Information website by June 12 to meet the 72-hour bill-in-print requirement.
If the Legislature schedules floor votes before June 15, the Budget Act must be in print prior to June 12 to comply with the 72-hour rule — for example, by June 10 for floor votes on June 13.
Trailer bills are also part of the state budget package. However, trailer bills do not have to be passed by June 15. Trailer bills generally make statutory changes needed to implement the policies assumed in the Budget Act.
Second Half of June
The governor and legislative leaders continue negotiating in order to reach a “three-way” (or “Big 3”) deal on the budget package for the upcoming fiscal year.
Once a deal is reached, the rest of the bills in the budget package are unveiled, consisting of multiple trailer bills along with at least one “Budget Bill Jr.” Budget Bill Jrs. amend the Budget Act as passed by the Legislature in order to reflect the changes required by the deal with the governor.
The Assembly and Senate publish summaries of the “Big 3” budget deal agreed to with the governor, and then the Legislature passes the full package of bills.
The governor signs the Budget Act, one or more Budget Bill Jrs., and the trailer bills (some trailer bills might not be signed until July).
Bills must be signed within 12 days of being presented to the governor. However, if the 12th day is a Saturday, a Sunday, or a holiday, the period is extended to the next day that is not a Saturday, a Sunday, or a holiday.
The governor may reduce or eliminate any item of appropriation in any bill (the “line-item veto”).
How Can TK-12 Advocates Participate in the State Budget Process?
TK-12 advocates can inform and influence budget choices by engaging with legislators and their staff as well as with executive branch officials.
Building Relationships Is Key to Effective Advocacy
Building relationships with policymakers and staffers in the Legislature and in the governor’s administration is the foundation of effective budget advocacy.
The Capitol runs on relationships: Who you know is critical to advancing your budget priorities, so it’s important to lay the groundwork for influence by building familiarity and trust with key players in the process by reaching out and scheduling a time to meet in person or virtually. Autumn can be the best time to reach out because workloads tend to be lighter, but it’s never too late to start.
Because turnover can be high in the Legislature and in the governor’s administration, it’s important to pay constant attention to relationship-building. There are always new faces to become acquainted with, so the work of relationship-building never ends.
Advocates Have Many Ways to Make Their Voices Heard
With relationships as a foundation, there are a range of tactics that advocates can use to ensure that their voices are heard in the state budget process. For example, you can:
Submit “budget letters” to policymakers outlining your budget priorities.
The public’s role includes writing letters that highlight your budget priorities and providing them to legislators and the governor’s administration.
While it’s acceptable to send information directly to budget committee consultants’ work emails, advocates should use this option prudently given the high volume of emails that committee consultants receive.
However, advocates should never send “spam” emails directly to budget committee consultants. These are email templates that hundreds or thousands of people can use to send the same message to policymakers and staff. Those kinds of emails should go to the dedicated budget committee email addresses instead.
Schedule meetings with key policymakers and staff in the Legislature and in the governor’s administration.
Building relationships is crucial to effective advocacy, so it’s important to lay the groundwork for influence by reaching out and scheduling times to meet with key legislators and their staff — particularly on the budget committees and in leadership positions — as well as with key contacts in the governor’s administration.
Provide public comments and — if invited — testify as part of a panel at budget subcommittee hearings.
You can share your views during public comment periods at budget subcommittee hearings on education funding and policy (the education subcommittees are “Sub 1” in the Senate and “Sub 3” in the Assembly).
Committee chairs set time limits for each public comment. Sometimes the limit is 1 minute, but it’s often shorter and may only include enough time for you to deliver a “me too” comment — name, organization, and position on the issue.
In addition, when invited by committee staff, you can provide testimony at a budget subcommittee hearing, which provides more time to share expertise on an issue as well as personal stories, which can be very impactful.
Participate in “lobby days” at the Capitol, joining forces with a broad range of TK-12 advocates.
Lobby days can be impactful — these events bring together hundreds or even thousands of advocates who join forces to focus media and policymakers’ attention on key policy issues, including those affecting TK-12 education.
Advocacy Opportunities During Each Phase of the State Budget Process
TK-12 advocates can press for their budget priorities throughout the year. This section outlines what you can do during each phase of the state budget process: July to December, January to mid-May, and mid-May to June.
Advocacy Opportunities: July to December
quick take: quietest period of the state budget process
Much happens behind the scenes from July to December, particularly in the governor’s administration, but advocates still have opportunities to make their voices heard.
Watch for budget developments in August that affect the issues you work on and be prepared to weigh in on any new proposals affecting TK-12 education.
Schedule introductory meetings with staffers in the Legislature and in the governor’s administration who will be helpful to know for your advocacy.
For the Legislature, check the Assembly and Senate websites to see which budget committee consultants focus on TK-12 education and get their email addresses.
For the governor’s administration, start with organizational charts that show who works in the Governor’s Office (the governor’s “inner circle” of advisers) and in key positions in the state departments and agencies. For contacts in the Department of Finance, see this chart of responsibilities.
Share your budget priorities with:
Key contacts in the Governor’s Office and in state departments, asking for your priorities to be included in the governor’s January 10 budget proposal.
Budget committee consultants as well as staff who work for legislative leadership (Assembly Speaker and the Senate President pro Tem).
Advocacy Opportunities: January to Mid-May
quick take: heart of the budget process
January to mid-May is the period with the most consistent and transparent opportunities for public engagement.
Write letters outlining your priorities, including weighing in on the governor’s January proposed budget. Deliver budget letters to the Assembly and Senate budget committee members and staff, legislative leadership, and the Governor’s Office.
Meet with contacts in the Governor’s Office and state departments to discuss the January proposed budget’s approach to education funding and policy and share your ideas for how to improve the governor’s proposals in the May Revision.
Look for opportunities to meet with key contacts in the Legislature to share your priorities and perspectives, including key staff and the chairs of the budget subcommittees, especially the education subcommittees: “Sub 1” in the Senate and “Sub 3” in the Assembly.
Draw attention to your issues by:
Taking advantage of public comment periods during budget hearings,
Focusing on storytelling (including highlighting real-world impacts of policy actions/inaction), and
Organizing public actions to raise awareness and garner local and statewide media coverage.
Advocacy Opportunities: Mid-May to June
quick take: fastest-moving period of the budget process
The quick pace during the mid-May to June period can make advocacy challenging as policymakers make major decisions in a short period of time.
Share your views on the May Revision (the governor’s revised budget) during the public comment periods at budget subcommittee hearings.
Urge key legislative staff and members to include your budget priorities in the joint Assembly-Senate budget plan — assuming your idea hasn’t already been embraced by either house or by the governor.
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California’s state budget reserves, including the “rainy day fund” and other reserve accounts, serve as a financial safety net for services like education, health care, and child care during economic downturns. The rules for depositing and withdrawing funds are complex, and policymakers should consider reforms, such as excluding reserve deposits from the Gann Limit spending cap, to strengthen the state budget’s resilience during a recession.
Introduction
California has several state budget reserves. These reserves help to maintain essential public services — like education, health care, and child care — when revenues fall short, such as during recessions. Reserves aren’t for everyday spending, but rather a financial safety net for the state.
This report describes California’s state budget reserves, explains how funds can be accessed and used, and discusses proposals to reshape these reserves that have been floated in recent years.
state budget Reserves in a nutshell
The Budget Stabilization Account (BSA), or “rainy day fund,” holds revenues to support any program funded through the state budget.
The Public School System Stabilization Account (PSSSA), or schools reserve, periodically holds revenues to support K-12 schools and community colleges.
The Safety Net Reserve periodically holds revenues intended to support the CalWORKs and Medi-Cal programs.
The Special Fund for Economic Uncertainties (SFEU) holds revenues to cover unexpected state budget costs during a fiscal year.
The Projected Surplus Temporary Holding Account can be used to temporarily set aside some anticipated surplus revenues and avoid spending funds that may not materialize.
Budget Stabilization Account (BSA): California’s Largest Reserve
The BSA is California’s largest state budget reserve. Deposits into and withdrawals from this “rainy day fund” are based on complex rules that were added to the state Constitution by Proposition 2 of 2014.1Prop. 2 was placed on the November 2014 statewide ballot by the Legislature; voters approved the measure by a more than 2-to-1 margin. Prop. 2’s rules are found in the California Constitution (Article XVI, Sections 20 to 22). Key rules include the following:
An annual deposit is required. Prop. 2 requires that 1.5% of General Fund revenues be set aside every year. Until 2029-30 half of these revenues must be deposited into the BSA and the other half must be used to pay down certain state debts.2Revenues that are set aside for paying down state debts may be used for several types of debt, including reducing unfunded liabilities associated with state-level pension plans and prefunding other retirement benefits, such as retiree health care. Beginning in 2030-31, the entire amount must be deposited into the BSA, although state leaders will have the option of redirecting up to one-half of each year’s deposit to pay down debts.
In some years, the state must set aside additional General Fund revenues. This occurs in years when estimated General Fund revenues that come from personal income taxes on capital gains exceed 8% of total General Fund proceeds of taxes.3A capital gain is the increase in the value of an asset — like stock market shares — between the date of purchase and the date of sale. This increase represents income to the asset holder and is subject to the personal income tax in California. The share of these “excess” capital gains revenues that is not owed to K-12 schools and community colleges under the state’s Prop. 98 funding guarantee must be used for BSA deposits and debt repayments, following the same requirements as the mandatory 1.5% deposit. Since Prop. 2 was enacted, capital gains tax revenues have exceeded the 8% threshold in most years, but could fall below the threshold in years when there are downturns in the stock market.
State leaders may also make discretionary deposits. In addition to the mandatory annual deposits required by Prop. 2, policymakers have the option of saving additional, discretionary revenue in the BSA.
The required annual deposit may be reduced or suspended in the event of a “budget emergency. If the governor declares a budget emergency, the state may reduce or suspend the required BSA deposit with a majority vote of each house of the Legislature.4In contrast, the portion of General Fund revenues that is required to be used for debt payments cannot be reduced or suspended under any circumstances. Prop. 2 defines a budget emergency as a situation where:
Conditions of disaster or extreme peril are present5A budget emergency that is declared in response to a disaster or extreme peril must meet the definition provided in Article XIII B, Section 3(c)(2) of the state Constitution. This section refers to the existence of “conditions of disaster or of extreme peril to the safety of persons and property within the State, or parts thereof” and defines these conditions as being “caused by such conditions as attack or probable or imminent attack by an enemy of the United States, fire, flood, drought, storm, civil disorder, earthquake, or volcanic eruption.”; or
The state has insufficient resources to maintain General Fund expenditures at the highest level of spending in the three most recent fiscal years, adjusted for state population growth and the change in the cost of living.6General Fund expenditures for the prior three fiscal years would be based on the level of spending “estimated at the time of enactment” of the budget bill for each fiscal year. The change in the “cost of living” would be measured using the California Consumer Price Index.
BSA funds may be withdrawn in the event of a budget emergency, but the entire balance cannot be removed at once. If the governor declares a budget emergency and the Legislature agrees with a majority vote of each house, funds may be taken out of the BSA.7The BSA balance may be reduced for another reason unrelated to a budget emergency. Specifically, Prop. 2 requires revisions to prior calculations of “excess” capital gains revenues — once in each of the two subsequent years — as updated revenue estimates become available. If a revision of “excess” capital gains revenues determines that a prior-year deposit to the BSA was greater than required, then the amount of funds equal to the over-deposit must be withdrawn from the reserve and returned to the General Fund. Alternatively, if a prior-year deposit was smaller than required, then funds must be added to the BSA to make up the difference. This after-the-fact “true-up” process does not apply to the portion of “excess” capital gains revenues that is used to pay down state debts each year. The true-up process also does not apply to the 1.5% of General Fund revenues that are required to be set aside each year. However, the entire balance cannot be removed immediately. Only the amount needed to address the budget emergency may be withdrawn, subject to the additional limitation that a withdrawal may not exceed 50% of the BSA balance in the first year of a budget emergency. In the second consecutive year of a budget emergency, all of the funds remaining in the BSA may be withdrawn.
Funds that are taken out of the BSA may go toward any purpose determined by the Legislature. For example, these dollars could be used for health care services, subsidized child care for working families, cash assistance for people with low incomes, K-12 schools, and any number of other public services and systems.
Funds in the BSA cannot exceed 10% of General Fund tax revenues. Prop. 2 caps the balance of the BSA. Once the balance — excluding any discretionary deposits — reaches 10% of General Fund tax revenues, any revenue that would otherwise have been required to go into the reserve must be instead spent on infrastructure, which includes housing. Prior to 2026, the BSA balance reached the cap twice — in 2022-23 and 2023-24 — but then dropped below the cap as state leaders withdrew funds in some years to address budget shortfalls.
Public School System Stabilization Account (PSSSA): The Reserve for K-12 Schools & Community Colleges
Prop. 2 of 2014 also established the PSSSA, the state’s budget reserve for California’s K-12 schools and community colleges. Prop. 2 does not require an annual deposit into this reserve. Moreover, Prop. 2 restricts the circumstances under which transfers to the PSSSA can occur. For a PSSSA deposit to be required, all of the following conditions must be met:
General Fund revenues that come from personal income taxes on capital gains are relatively strong;8Specifically, capital gains revenues must exceed 8% of total General Fund proceeds of taxes.
Growth in General Fund revenues leads to relatively strong growth in the state’s annual minimum funding guarantee for K-12 schools and community colleges;9A PSSSA deposit can only occur in so-called “Test 1” years under the state’s Prop. 98 minimum funding guarantee for K-12 schools and community colleges. Test 1, which guarantees K-14 education a percentage of General Fund revenues. However, even in certain Test 1 years, the amount of growth in state per capita personal income from the prior year can prevent a deposit to the PSSSA. and
The Legislature does not suspend the annual K-14 education minimum funding guarantee.
Even under these restricted circumstances, Prop. 2 limits the size of the deposit to the schools reserve when such a deposit is required.10For example, Prop. 2 specifies that transfers to the PSSSA may not exceed the difference between the Test 1 funding level under Prop. 98 and the “Test 2” funding level, which is determined by year-to-year growth in state per capita personal income. Prop. 2 also limits the size of the deposits to the PSSSA by prioritizing funding for K-14 education cost-of-living adjustments over deposits to the PSSSA.
Deposits to the PSSSA may be reduced or suspended in the event of a budget emergency under the same rules that govern reductions or suspensions of deposits to the BSA (see the prior section of this report). Similarly, funds may be withdrawn from the schools reserve if the governor declares a budget emergency and the Legislature agrees with a majority vote of each house.11Prop. 2 requires funds to be withdrawn from the PSSSA, even without a declaration of a budget emergency, when prior-year PSSSA deposits were greater than required. Prop. 2 also requires a withdrawal of funds from the PSSSA in any year when the Prop. 98 minimum funding guarantee is less than the prior-year Prop. 98 funding level, adjusted for changes in student attendance and the cost of living. In this case, the required withdrawal would be limited to the amount needed to reach the prior year’s funding level. Prop. 2 defines change in “cost of living” as the higher of 1) the percent change in California per capita personal income from the preceding year or 2) the cost-of-living adjustment applied to school district and community college district general purpose apportionments.
In contrast to the rules governing the withdrawal of funds from the BSA, all of the PSSSA funds may be withdrawn in one year. Moreover, funds withdrawn from the PSSSA must be used to support K-12 schools and community colleges.
Safety Net Reserve: Funds to Protect the Medi-Cal and CalWORKs Programs
The Safety Net Reserve was created in 2018 to set aside funds to help cover the costs of two programs that often see increases in enrollment during recessions: Medi-Cal and California Work Opportunity and Responsibility to Kids (CalWORKs).12The Safety Net Fund is authorized in California Welfare and Institutions Code, Section 11011. Both of these programs serve Californians with low incomes — with Medi-Cal delivering health coverage, and CalWORKs providing modest cash assistance to families with children. During economic downturns, more people become unemployed and temporarily rely on these programs to cover their basic needs, increasing state costs.
The Safety Net Reserve is not a constitutional reserve, so there are no binding requirements governing deposits or withdrawals. This means that funds can be transferred into and withdrawn from the reserve at the discretion of the Legislature. In fact, state policymakers voluntarily deposited $900 million in the Safety Net Reserve before draining all of those funds in 2024 to help address a $55 billion state budget problem.
Moreover, while state law specifies that the funds are to be used only for Medi-Cal and CalWORKs costs during economic downturns, state policymakers could decide to modify this language and use the funds for other purposes. However, in establishing this reserve, policymakers clearly recognized the need to protect critical services for Californians with low incomes from budget cuts — cuts that would undermine Medi-Cal and CalWORKs at the very time that these programs are needed most.
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
Special Fund for Economic Uncertainties (SFEU): The Discretionary Reserve
The SFEU is the state’s discretionary General Fund budget reserve, meaning policymakers have a great deal of latitude in spending the funds in the reserve.13The SFEU (originally called the “Reserve for Economic Uncertainties”) was created through the 1980-81 Budget Act and is authorized in California Government Code, Section 16418. The amount of money in the SFEU is equal to the difference between General Fund resources and General Fund spending in a given fiscal year.14Specifically, the SFEU balance is equal to the General Fund balance carried over from the prior year, plus revenues and transfers, minus expenditures and encumbrances. Legislative Analyst’s Office, The 2020-21 Budget: Structuring the Budget (February 10, 2020), p. 11.
The SFEU acts as a buffer against unanticipated revenue shortfalls or spending increases. Due to California’s constitutional balanced-budget requirement, which requires the state to enact a budget in which spending does not exceed available resources, the projected SFEU balance cannot be less than zero at the time the annual budget is adopted. However, if state revenues come in lower than projected and/or spending unexpectedly rises, the SFEU balance will decline, and may become negative as spending begins to exceed revenues.
The Legislature can appropriate funds from the SFEU at any time and for any purpose. Additionally, in the event of a disaster, the governor can allocate funds from the SFEU without the prior approval of the Legislature. Specifically, when the governor declares a state of emergency, the Department of Finance (DOF) can transfer funds from the SFEU into a subaccount called the Disaster Response-Emergency Operations Account (DREOA).15The amount that may be transferred to the DREOA is limited to the amount necessary to cover disaster-related claims that exceed the available balance in the account. California Government Code, Section 8690.6(d). These funds are allocated to state agencies for costs that are “immediate and necessary to deal with an ongoing or emerging crisis.”16The DOF is required to notify the Joint Legislative Budget Committee as well as the fiscal committees in each house before any funds may be allocated from the SFEU in response to a disaster. Funds in the DREOA can be spent for disaster response costs that occur within 120 days of the Governor’s emergency proclamation. The DOF can extend this time period in up to 120-day increments upon notifying the Legislature, subject to certain limitations. California Government Code, Section 8690.6.
Projected Surplus Temporary Holding Account: A Place to Set Aside Anticipated Surplus Revenues
State leaders created the Projected Surplus Temporary Holding Account in 2024. This account gives policymakers a place to temporarily set aside anticipated surplus revenues, “ensuring that funds are only spent once they are realized.”17Office of Governor Gavin Newsom, press release (September 30, 2024).
State leaders have broad authority to determine whether or how to use this holding account. The only requirement is that revenues that go into the account cannot remain there for longer than one year. If state revenues materialize as projected, the revenues in the account may be spent for any purpose or transferred back to the General Fund for future use.18California Government Code, Section 16418.7.
This holding account is a “pilot budgeting project” that expires at the end of 2030, although state leaders could approve an extension as well as potentially modify the rules.
What’s Next for California’s State Budget Reserves?
The rules that govern California’s budget reserves can be amended by voters or state policymakers. Changing the reserve rules established by Prop. 2 (2014) would require voters to approve a constitutional amendment.19Amendments can be placed on a statewide ballot through a citizens initiative or by the Legislature. Other reserve rules can be changed by state policymakers without the need for voter approval.
In recent years, state policymakers and others have advanced proposals to revise California’s reserve policies, although none have moved beyond the conceptual stage. Common proposals for changing state reserve policies include the following:
Proposals to increase the share of state General Fund revenue deposited into the Budget Stabilization Account (BSA), or rainy day fund.
Proposals to require a substantially larger share of General Fund revenue to go into the BSA raise concerns. Such changes would reduce annual funding available to address Californians’ growing needs. While saving for a rainy day is important, it shouldn’t come at the cost of meeting people’s needs today.
If policymakers want to increase state reserves, they can do so without requiring more revenue to be deposited into the BSA. State leaders currently have the authority to make discretionary deposits into the rainy day fund and other reserves, like the Safety Net Reserve. Discretionary deposits can be made periodically and can be accessed more easily than the BSA’s mandatory deposits, which are subject to stricter withdrawal conditions.
State leaders also can build up the rainy day fund through policies that increase General Fund revenue. This is because higher revenue would automatically boost annual deposits into the BSA under current Prop. 2 rules.
Proposals to allow the balance of the BSA to grow beyond 10% of annual state General Fund revenue.
Increasing the maximum size of the BSA above the current 10% cap would be an acceptable change — but only if the proportion of General Fund revenue that must be deposited into the BSA does not also increase substantially. Raising the 10% cap while also shifting a larger share of revenue into the rainy day fund would leave less funding to support the critical services that Californians need.
Proposals to exclude reserve deposits from California’s spending cap, or “Gann Limit.”
Excluding reserve deposits from California’s spending cap would be a sensible change. Currently, deposits into the BSA and other state budget reserves are classified as “expenditures” under the Gann Limit, which voters created by passing Prop. 4 in 1979.
Counting reserve deposits as “spending” increases the likelihood that the state will exceed the spending cap in years when revenues are strong. When revenues go over the Gann Limit, state leaders lose the ability to spend those dollars in ways that address Californians’ most pressing needs. Therefore, excluding deposits from the limit would allow state policymakers to build up budget reserves in years when revenues are particularly strong — which is exactly when the state is most likely to exceed the spending cap.
Changes to the rainy day fund or the Gann Limit would require amending the state Constitution. This means that voters would have the last word on the most significant proposals to modify California’s state budget reserves.
Prop. 2 was placed on the November 2014 statewide ballot by the Legislature; voters approved the measure by a more than 2-to-1 margin. Prop. 2’s rules are found in the California Constitution (Article XVI, Sections 20 to 22). ↩︎
2
Revenues that are set aside for paying down state debts may be used for several types of debt, including reducing unfunded liabilities associated with state-level pension plans and prefunding other retirement benefits, such as retiree health care. ↩︎
3
A capital gain is the increase in the value of an asset — like stock market shares — between the date of purchase and the date of sale. This increase represents income to the asset holder and is subject to the personal income tax in California. ↩︎
4
In contrast, the portion of General Fund revenues that is required to be used for debt payments cannot be reduced or suspended under any circumstances. ↩︎
5
A budget emergency that is declared in response to a disaster or extreme peril must meet the definition provided in Article XIII B, Section 3(c)(2) of the state Constitution. This section refers to the existence of “conditions of disaster or of extreme peril to the safety of persons and property within the State, or parts thereof” and defines these conditions as being “caused by such conditions as attack or probable or imminent attack by an enemy of the United States, fire, flood, drought, storm, civil disorder, earthquake, or volcanic eruption.” ↩︎
6
General Fund expenditures for the prior three fiscal years would be based on the level of spending “estimated at the time of enactment” of the budget bill for each fiscal year. The change in the “cost of living” would be measured using the California Consumer Price Index. ↩︎
7
The BSA balance may be reduced for another reason unrelated to a budget emergency. Specifically, Prop. 2 requires revisions to prior calculations of “excess” capital gains revenues — once in each of the two subsequent years — as updated revenue estimates become available. If a revision of “excess” capital gains revenues determines that a prior-year deposit to the BSA was greater than required, then the amount of funds equal to the over-deposit must be withdrawn from the reserve and returned to the General Fund. Alternatively, if a prior-year deposit was smaller than required, then funds must be added to the BSA to make up the difference. This after-the-fact “true-up” process does not apply to the portion of “excess” capital gains revenues that is used to pay down state debts each year. The true-up process also does not apply to the 1.5% of General Fund revenues that are required to be set aside each year. ↩︎
8
Specifically, capital gains revenues must exceed 8% of total General Fund proceeds of taxes. ↩︎
9
A PSSSA deposit can only occur in so-called “Test 1” years under the state’s Prop. 98 minimum funding guarantee for K-12 schools and community colleges. Test 1, which guarantees K-14 education a percentage of General Fund revenues. However, even in certain Test 1 years, the amount of growth in state per capita personal income from the prior year can prevent a deposit to the PSSSA. ↩︎
10
For example, Prop. 2 specifies that transfers to the PSSSA may not exceed the difference between the Test 1 funding level under Prop. 98 and the “Test 2” funding level, which is determined by year-to-year growth in state per capita personal income. Prop. 2 also limits the size of the deposits to the PSSSA by prioritizing funding for K-14 education cost-of-living adjustments over deposits to the PSSSA. ↩︎
11
Prop. 2 requires funds to be withdrawn from the PSSSA, even without a declaration of a budget emergency, when prior-year PSSSA deposits were greater than required. Prop. 2 also requires a withdrawal of funds from the PSSSA in any year when the Prop. 98 minimum funding guarantee is less than the prior-year Prop. 98 funding level, adjusted for changes in student attendance and the cost of living. In this case, the required withdrawal would be limited to the amount needed to reach the prior year’s funding level. Prop. 2 defines change in “cost of living” as the higher of 1) the percent change in California per capita personal income from the preceding year or 2) the cost-of-living adjustment applied to school district and community college district general purpose apportionments. ↩︎
12
The Safety Net Fund is authorized in California Welfare and Institutions Code, Section 11011. ↩︎
13
The SFEU (originally called the “Reserve for Economic Uncertainties”) was created through the 1980-81 Budget Act and is authorized in California Government Code, Section 16418. ↩︎
14
Specifically, the SFEU balance is equal to the General Fund balance carried over from the prior year, plus revenues and transfers, minus expenditures and encumbrances. Legislative Analyst’s Office, The 2020-21 Budget: Structuring the Budget (February 10, 2020), p. 11. ↩︎
15
The amount that may be transferred to the DREOA is limited to the amount necessary to cover disaster-related claims that exceed the available balance in the account. California Government Code, Section 8690.6(d). ↩︎
16
The DOF is required to notify the Joint Legislative Budget Committee as well as the fiscal committees in each house before any funds may be allocated from the SFEU in response to a disaster. Funds in the DREOA can be spent for disaster response costs that occur within 120 days of the Governor’s emergency proclamation. The DOF can extend this time period in up to 120-day increments upon notifying the Legislature, subject to certain limitations. California Government Code, Section 8690.6. ↩︎
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California has several budget reserves that help to manage annual state revenues and protect services when the state faces a budget deficit. California’s Constitution and state law govern when funds may be withdrawn from the state’s reserves, the amount that can be withdrawn, and how funds may be used.
TWO RESERVE ACCOUNTS ARE ESTABLISHED IN THE STATE CONSTITUTION:
Budget Stabilization Account (BSA)
Public School System Stabilization Account (PSSSA)
Three reserve accounts are established in state law:
Safety Net Reserve
Special Fund for Economic Uncertainties (SFEU)
Projected Surplus Temporary Holding Account
The following table answers five key questions about California’s budget reserves:
Is the state required to make an annual deposit?
Can a required deposit be reduced or suspended — and by who?
When can the funds be withdrawn?
Is there a limit on the amount of funds that can be withdrawn?
How can the funds be used by the state?
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
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Watch to learn more
Just like households save for emergencies, California sets aside money in budget reserves. Budget reserves are California’s way of preparing for the unexpected, saving a little today to protect vital public services tomorrow.
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
In this video, we break down how California’s state reserves work, including the four main reserve accounts: the Budget Stabilization Account (the state’s “rainy day fund”), the Public School System Stabilization Account, the Safety Net Reserve, and the Special Fund for Economic Uncertainties.
Learn how these reserves are funded, when they can be used, and why balancing savings with current investments is key to supporting Californians’ well-being.
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What’s the difference between income and wealth? Taxes for individuals and corporations in California? Tax credits and deductions? Corporate revenues and corporate profits? Understanding these key terms is critical to navigating the state budget and its intersection with California’s tax and revenue system to generate ongoing resources and provide quality education, affordable health care, child care, housing, and other services for communities.
Generally, a tax filer’s total income before deductions. However, some types of income are not included in AGI; for example, income from Social Security and unemployment benefits is not included in California AGI. Additionally, certain “above-the-line” deductions can reduce AGI. Because federal and California law differ in these exclusions and deductions, a tax filer’s federal AGI may not match their California AGI.
Alternative Minimum Tax (AMT)
Certain tax filers must use an alternative calculation of tax liability if they benefit from certain tax expenditures and the tax that they would owe under the alternative method exceeds what they would owe under the regular method. The purpose of the AMT is to ensure that tax filers that take advantage of tax expenditures pay a minimum amount of tax on that preferentially treated income. California has an AMT for both individual tax filers and corporate tax filers. The corporate AMT is paid by only around 1% of corporate tax filers and accounts for less than 1% of corporate tax revenues. It does not prevent corporations from using tax credits to reduce their tax liability.
The corporate AMT is distinct from the $800 minimum franchise tax that is applied to most companies doing business in the state.
Apportionment
The process of dividing a corporation’s profits between jurisdictions where it operates in order to determine the share of the total profits that can be taxed in each jurisdiction. This is only applicable for businesses that do business both inside and outside of the state. In California, most corporations (as well as pass-through businesses) are required to apportion their profits by multiplying their total profits by their sales factor, which is the ratio of their California sales to their total sales. The result is the corporation’s state net income, the amount taxable in California. To arrive at the final tax bill, a corporation can then subtract net operating losses from its state net income, multiply the result by the applicable corporate tax rate, and subtract any available tax credits, which can result in a very low effective tax rate (well below the 8.84% rate for C corporations).
The only types of corporations that use a different apportionment formula are those in the agricultural and extractive industries (such as oil, gas, and mineral extraction corporations). These corporations instead use an apportionment factor that averages their California shares of their total sales, payroll, and property.
Asset
Property owned by an individual or business that is expected to provide a future economic benefit. Examples include financial assets such as stocks and bonds as well as physical assets such as real estate, vehicles, and business equipment.
C Corporation
A type of corporation that pays federal and state taxes based on its total profits (net income) at the entity level before profits are distributed to shareholders, who pay personal income tax on those distributions. C corporations are taxed differently from S corporations and other pass-through business entities. Corporations are subject to an 8.84% tax in California. Unlike S corporations, which can have up to 100 shareholders, C corporations can have unlimited shareholders; thus, most corporations listed on public stock exchanges, including most household-name companies, are organized as C corporations.
California Competes Tax Credit
A tax credit for businesses that commit to making investments and creating jobs in California. Credits are allocated through a competitive application process. The maximum amount of credits that can be awarded each year is $180 million.
Capital Gain
Generally, the difference between the value of an asset when sold and when it was originally purchased. California and the federal government generally do not tax the increase in the value of an asset until it is sold; this is sometimes referred to as a capital gain being “realized.” In contrast, an “unrealized capital gain” refers to the increase in value of an asset that has not yet been sold. In California, capital gains are taxed at the same rate as income from employment, whereas at the federal level, they are subject to lower tax rates than employment income.
Corporate Revenues
The money a corporation receives from the sale of goods and services before accounting for expenses, such as wages and salaries and the costs of business inputs. This is distinct from profit (net income), which represents the income remaining after costs are deducted, and gross receipts, which is the sum of revenues from core operations and other types of income.
Corporate Profit (alternatively, Net Income)
The money a corporation has remaining after deducting its expenses from its gross receipts for a given period. California’s corporation tax is levied on the share of a corporation’s net income attributable to California based on the applicable apportionment formula.
Corporation Tax
A tax imposed on corporations that derive income from California — with the exception of insurance companies, which instead pay the insurance tax. California only taxes the share of a corporation’s profits (net income) earned in California, determined by an apportionment formula. In California, C corporations are subject to an 8.84% tax on their profits and S corporations are subject to a 1.5% tax, in addition to the personal income tax S corporation owners pay on their share of the corporation’s profits. Banks and other financial institutions pay an additional 2% bank tax, as they are exempt from personal property taxes and all other local business taxes paid by other corporations. Corporations must pay at least the minimum franchise tax, and a small share of corporations are also subject to an alternative minimum tax.
Deduction
A reduction in taxable income (or a reduction in Adjusted Gross Income, in some cases) for certain expenses. For individuals, deductions cannot reduce taxable income below zero. Many deductions are available only to tax filers who claim itemized deductions. Because the value of a deduction is based on a tax filer’s tax bracket, and higher-income households are subject to higher income-tax rates, they receive larger savings for each dollar deducted than do lower-income households, which are subject to a lower tax rate.
Corporations and other businesses can deduct costs such as salaries and wages, interest, advertising, and other expenses from their total income. If a business’s deductions exceed its income, this generates a net operating loss, which can be carried forward to future years to reduce taxable income across several years.
Dividends
A distribution of a corporation’s profits to its shareholders. Like capital gains, dividends are taxed as ordinary income in California but are subject to lower rates by the federal government.
Earned Income Tax Credit (EITC)
Arefundable tax credit that boosts the incomes of workers with low wages, and that is provided in both federal and California tax law. The credit increases as earnings rise up to a maximum point, after which the credit phases out. California’s Earned Income Tax Credit (CalEITC) is modeled on the federal EITC, but structured differently. California also provides an additional credit for CalEITC-eligible families with children under age 6, the Young Child Tax Credit.
Effective Tax Rate
The percentage of the tax base that is actually paid in tax after taking into account applicable credits, exemptions, deductions, and other tax preferences. Due to these preferences — as well as the graduated rate structure for the personal income tax — the effective tax rate is lower than the statutory or marginal tax rate.
Estate Tax
A tax imposed on someone’s estate, meaning the value of their assets upon their death. In contrast to an inheritance tax, an estate tax is paid by the estate prior to distribution to heirs and other beneficiaries. Currently, the federal government imposes an estate tax on high-valued estates, but California does not impose an estate tax. California voters approved Proposition 6 in 1982, which repealed the state’s existing inheritance tax and prohibited the enactment of future taxes on estates, inheritances, or any transfer occurring upon death. Thus, any proposed estate tax would need to be approved by California voters.
Excise Tax
A tax on the sale of a specific good, such as alcohol, tobacco, or gasoline.
Exclusion
A provision that allows certain types of income to be ignored in tax calculations. For example, California does not require tax filers to include income from Social Security or unemployment benefits in their total income for tax purposes.
Exemption
This can have different meanings in different contexts.
At the federal level, tax filers were able to claim “personal exemptions,” essentially a deduction of a flat dollar amount per tax filer and dependent, prior to 2018. However, the 2017 “Tax Cuts and Jobs Act” suspended personal exemptions through 2025.
California offers “exemption credits,” which are nonrefundable tax credits of a set dollar amount for each tax filer and dependent, with higher amounts for blind individuals, seniors, and dependents.
California law includes many sales tax exemptions, where certain types of items are not subject to the sales tax. The largest of these sales tax exemptions are for food products, prescription medications, and utilities.
Some organizations, such as nonprofit, educational, and religious organizations, can have tax-exempt status, meaning they are generally not subject to corporation taxes.
Filing Status
The category a tax filer belongs to based on their marital status and family structure. One’s filing status affects the applicable income thresholds for each tax bracket, the amount of the standard deduction, and the qualification criteria for some tax expenditures. There are five filing status at both the state and federal levels:
Single
Married filing jointly (also applies to Registered Domestic Partnerships in California)
Married (or Registered Domestic Partnership) filing separately
Head of household
Qualifying widow(er)
Film Tax Credit
A tax credit for businesses engaged in film and television production. California’s Film & Television Tax Credit Program allocates tax credit awards to film and television productions made in California through a competitive application process. For fiscal years 2025-26 through 2029-30, the maximum amount of credits that can be awarded each year is $750 million — up from $330 million for fiscal years 2015-16 through 2024-25. While the credit has historically been nonrefundable, businesses can elect to receive a refundable credit for 2025-26 through 2029-30 — meaning they can get cash back if their credit allocation exceeds their tax liability — but the credit amount would be reduced by 10% and must be claimed across a 5-year period. The credit can only be claimed once filming is completed, and can be taken over a multi-year period.
Graduated Income Tax
An income tax structure in which the tax rate increases with income, with the first x dollars subject to a low rate, the next y dollars subject to a higher rate, and so on. California has a graduated income tax structure, with rates ranging from 1% to 12.3% — before the application of a 1% surtax on income above $1 million to fund mental health services. This structure, along with tax preferences such as exemptions, deductions, and credits, reduces tax filers’ effective tax rate below their marginal tax rate.
Gross Receipts
The total amount of money a corporation or other business receives for a given period — including revenues from sales as well as other types of income, such as interest, dividends, and rental income — before deducting its costs. California’s corporation tax is not levied on gross receipts, but some other state and local governments have taxes applied to a company’s gross receipts.
Horizontal Equity
Along with vertical equity, one of the two principles of tax equity. Horizontal equity isthe concept that tax filers with similar economic circumstances should be taxed similarly. For example, under Proposition 13 of 1978, California’s local property tax is based on the inflation-adjusted purchase price of the property rather than its current market value, meaning two tax filers owning properties with the same market value may owe significantly different amounts of tax based on when they purchased the property. This Prop. 13 policy violates the principle of horizontal equity.
Income
Money received over a certain period by an individual, family, or household, such as money from employment, investments, business ownership, and other sources. Income is not equivalent to wealth.
5 Facts to Know About Corporate Taxes in California
Corporate tax breaks and profit shifting reduce state revenues by billions annually. Reining in corporate tax breaks and strengthening California’s revenue base is long overdue.
A tax on the value of inherited wealth received by an heir, in contrast to an estate tax, which is applied directly to the decedent’s estate before assets are distributed to beneficiaries. California voters approved Proposition 6 in 1982, which repealed the state’s existing inheritance tax and prohibited the enactment of future taxes on estates, inheritances, or any transfer occurring upon death. Thus, any proposal to reinstate an inheritance tax would need to be approved by California voters.
Insurance Tax
A tax on the premiums received by insurance companies. This tax is paid by insurance companies in lieu of the corporation tax.
Investment Income
Income received from investmenting in assets, including capital gains, dividends, and interest payments.
Itemized Deduction
A deduction for specific types of expenses. Major itemized deductions allowed under California’s tax law include those for mortgage interest, local property taxes, charitable contributions, an employee’s business-related and miscellaneous expenses, and large medical expenses. At both the federal and state levels, tax filers choose between taking a flat standard deduction or itemizing their deductions. Itemizing deductions generally benefits higher-income tax filers most, since they are more likely to have high-value homes — and therefore large expenses for mortgage interest and property taxes — and more likely to donate large sums to charity. However, California law does reduce the amount of itemized deductions allowed for tax filers with federal Adjusted Gross Income above specified thresholds (roughly $200,000 for single filers, $300,000 for heads of household, and $400,000 for joint filers).
Limited Liability Company (LLC)
A type of business that blends corporate and partnership structures and can elect to be taxed as a partnership or as a corporation. LLCs are also required under California law to pay an annual tax of $800 as well as a tiered fee based on income.
Marginal Tax Rate
The rate at which one’s highest increment of income is taxed. Due to California’s graduated income taxstructure, a tax filer’s marginal tax rate is higher than their effective tax rate. For example, under California’s 2021 personal income tax brackets, a single tax filer with a taxable income of $150,000 had a top marginal rate of 9.3%, but they only paid this rate on income above $61,214. The first $9,325 of their income was subject to a 1% rate, then income between $9,325 and $22,107 was subject to a 2% rate, and so on. Due to this tiered rate structure, this tax filer’s effective tax rate would be well below 9.3%.
Minimum Franchise Tax
An $800 tax that corporations doing business in California must pay if their regular corporate tax liability is lower than that amount. Corporations are exempt from this tax in their first year of operating in California.
Net Operating Loss (NOL)
The amount by which a business’ deductions exceeds its total income in years when it experiences a loss rather than a profit. Net operating losses incurred during loss years can be carried forward to reduce a business’ taxable income in future years when it is profitable — potentially down to zero.
Nonrefundable Tax Credit
A tax credit that cannot exceed a tax filer’s tax liability, or in other words, cannot reduce tax liability below zero. For example, if a tax filer has a tax liability of $1,500 and would otherwise qualify for a tax credit of $2,000, the credit would be capped at $1,500. This means that tax filers with low incomes who have little to no personal income tax liability often do not fully benefit from these credits. California’s Renter’s Credit and Child and Dependent Care Credit are nonrefundable.
Partnership
A type of pass-through business where the business’ income (or loss) is passed through to its partners. There are two common types of partnerships: limited partnerships, which are required to pay an annual entity-level tax of $800 in California; and general partnerships, which are not required to pay an entity-level tax.
Pass-Through Business
A type of business entity which is not subject to the regular federal or state taxes on corporations, and instead passes income (or losses) through to its owners, who report it on their personal income tax returns. Depending on the type of pass-through business, the entity may also be required to pay an annual tax or fee in California. Pass-through entities include S corporations, partnerships, limited liability companies, and sole proprietorships.
Personal Income Tax
A tax on the income of California residents as well as the income of nonresidents derived from California sources. The tax applies to income from employment, investments, pass-through businesses, and retirement plans. California’s personal income tax has a graduated rate structure that includes nine tax brackets, with rates ranging from 1% on the lowest share of income up to 12.3%. California also levies a 1% surtax on all income above $1 million to fund mental health services. Due to its graduated structure and other features, California’s personal income tax is a progressive tax. The personal income tax is California’s largest source of revenues.
Progressive Tax
A tax which takes up a higher share of income for higher-income households than for lower-income households. California’s personal income tax is a progressive tax.
Property Tax
A tax on real property (land and buildings) and certain types of personal property, including aircraft, watercraft, and business equipment and fixtures. Property taxes remain within the county where they are collected and are allocated among the county government, cities, K-12 schools and community colleges, and special districts based on formulas outlined in state law. While the property tax is a local revenue source, it is governed by provisions put into the state Constitution by Proposition 13 of 1978 and subsequent ballot measures. Under Prop. 13, the general property tax rate is capped at 1% of the assessed value of the property, which for real property is limited to its purchase price plus an annual inflation adjustment not exceeding 2%.
Proportional Tax
Also called a “flat” tax, a tax which takes up the same percentage of income for all households.
Refundable Tax Credit
A tax credit which can reduce a tax filer’s tax liability below zero and provide the difference as a refund. For example, if a tax filer has a tax liability of $1,500 and is eligible for a $2,000 credit, the credit will zero out their tax liability and provide a $500 refund. Because low-income families often have little to no tax liability, a tax credit will only fully benefit these families if it is refundable. The federal Earned Income Tax Credit and California’s Earned Income Tax Credit (CalEITC) and Young Child Tax Credit are refundable.
Regressive Tax
A tax that takes up a larger share of income for lower-income households than for higher-income households. Examples include the sales and use tax and excise taxes. Federal tariffs — or taxes on imported goods — also function as regressive taxes as they drive up the costs of consumer goods, which disproportionately impact households with lower incomes.
Research and Development (R&D) Tax Credit
A tax credit for businesses that make investments in research and development. In California, there is no limit on the amount of research and development credits that businesses can claim in any given year — any business that meets the eligibility criteria can claim the credit. The credit is generally nonrefundable, so a business cannot use credits to reduce its tax bill below zero and get a cash refund, but businesses may carry forward unused credits indefinitely to reduce their tax bills in future years. The R&D credit costs the state an estimated $2 billion to $3 billion each year.
S Corporation
Formally known as a “Subchapter S corporation,” a type of corporation that is taxed as a pass-through business and has no more than 100 shareholders. State law also requires S Corporations to pay the higher of a $800 minimum franchise tax or 1.5% of its California income.
Sales Factor
The ratio of a business’ California sales to its total sales. This percentage is used to apportion a business’ profits — or approximate the share of its total profits that is attributable to California and can be taxed in California.
Sales and Use Tax
A tax on the purchase of tangible goods in California (the sales tax) or on the use of tangible goods in California that were purchased elsewhere (the use tax). The sales and use tax is California’s second-largest revenue source. Services are excluded from the sales and use tax, as are other items exempted by law, including groceries and medications. The sales and use tax is a regressive tax, because lower-income households generally must spend a larger share of their incomes on necessities than higher-income households, so a larger share of their income goes to sales taxes.
Water’s Edge: Closing the Largest Corporate Tax Loophole in California
Did you know? Closing the water’s edge loophole would address offshore tax avoidance and raise $3 Billion in state revenues.
A type of pass-through business owned by an individual, or couple, who reports the business’ income on their personal income tax return rather than being subject to corporation taxes.
Standard Deduction
A deduction that tax filers can claim on federal and California tax returns instead of claiming itemized deductions. A standard deduction is a set amount that only varies by filing status. For 2021, the California standard deduction was $4,803 for single filers and married couples filing separately, and $9,606 for married couples filing jointly, heads of household, and qualifying widow(er). These amounts are adjusted annually for inflation.
State and Local Tax (SALT) Deduction
A federal itemized deduction for state and local taxes paid, including property taxes and either income or sales taxes. The federal tax changes of 2017 (the “Tax Cuts and Jobs Act”) limited the deduction any tax filer can take to $10,000 (through 2025). California allows a similar deduction for property taxes and certain other state, local, and foreign taxes, but does not limit the amount of the deduction.
Stepped-Up Basis (alternatively, “Basis Step-Up”)
A tax provision in both federal and California law that allows heirs who have inherited assets to exclude the capital gain — or increase in value of the asset — that accrued before the inheritance for the purpose of calculating income taxes when they sell those assets.
For example, if a parent purchased an asset — such as shares of stock — for $100,000 and the value has increased to $200,000 by the time their child inherited the asset, the child could then sell those shares and pay no capital gain tax on that $100,000 increase in value. The child would only owe tax on any further increase in value starting from the time of inheritance — so if the child sold the asset one year later and it had increased in value to $250,000, they would only pay tax on the $50,000 increase in value after inheritance rather than the full $150,000 increase.
Surtax
An additional tax levied on top of the regular tax structure. For example, California voters approved Proposition 63 in 2004, which created a 1% surtax on taxable income over $1 million to fund mental health services. This is in addition to the tax owed according to the state’s regular personal income tax structure with a top rate of 12.3%, making the combined top tax rate 13.3%.
Tax Avoidance
Legal methods of reducing tax liability (in contrast to tax evasion).
Tax Base
The universe of income, assets, sales, or other economic activity subject to tax. Tax expenditures narrow the tax base, whereas eliminating or limiting tax expenditures broadens the tax base.
Tax Brackets
Ranges of taxable income that are subject to a given tax rate. The brackets vary by filing status; in California’s personal income tax system, the income thresholds for each bracket for couples filing taxes jointly are two times the thresholds for single filers. Additionally, the thresholds are higher for Californians who file as heads of household than for single filers.
Tax Conformity
This term refers to alignment between California’s tax law and the federal tax code. California’s tax law contains many references to federal tax law, but unlike many other states, California does not automatically adopt, or “conform to,” changes to the federal tax code. Instead, the Legislature must take action to incorporate federal tax changes — in part or in whole — into state law. At the time this glossary was published, references in California’s tax law to the federal Internal Revenue Code generally pointed to the federal code as it read on January 1, 2015. However, state policymakers have incorporated into state law selected federal tax changes that occurred after that date.
Tax Credit
A dollar-for-dollar reduction in tax liability for individual or corporate tax filers. Tax credits can be refundable or nonrefundable.
Tax Evasion
Illegal methods of avoiding or reducing taxes, such as deliberate non-payment or underpayment.
Tax Expenditure
Refers to exceptions to “normal tax law” that reduce the revenue governments would otherwise collect. These exceptions include, but are not limited to, exemptions, deductions, exclusions, tax credits, deferrals, elections, and preferential tax rates. Tax expenditures can be commonly referred to as tax breaks, tax loopholes, or tax preferences.
Tax Haven
A country or other type of jurisdiction with very low or zero tax rates. Businesses and individuals can transfer money into tax havens and reduce their tax liabilities through both legal tax avoidance and illegal tax evasion. These jurisdictions often also have features that provide secrecy for individuals and businesses holding money in those locations, making it more difficult for tax authorities to effectively identify cases of tax avoidance and evasion.
Tax Liability
The amount of tax owed. Tax credits can reduce tax liability; nonrefundable tax credits cannot reduce tax liability below zero, but refundable tax credits can.
Tax Rate Schedule
A table indicating the tax rates that apply to each interval of taxable income. California’s personal income tax has three tax rate schedules, which tax filers with taxable income above $100,000 must use to determine their tax liability: “Schedule X” applies to single filers and married/Registered Domestic Partnership couples filing separately; “Schedule Y” applies to married/Registered Domestic Partnership couples filing jointly and qualifying widow(er)s; and “Schedule Z” applies to head of household filers. Filers with taxable income of $100,000 or less consult a tax table to determine their state personal income tax liability instead of using the tax rate schedule.
Tax Table
A table that California tax filers with taxable incomes of $100,000 or less use to look up the amount of their state income tax liability. In contrast to California’s tax rate schedules — which include precise tax liability calculations — the tax table assigns one rounded tax amount to filers of a given filing status with taxable incomes within intervals of approximately $100.
Taxable Income
The result of subtracting a tax filer’s standard deduction or itemized deductions from their Adjusted Gross Income. A filer’s tax liability is determined by applying the applicable tax rates to their taxable income.
Vertical Equity
Along with horizontal equity, one of the two types of equity considered when evaluating tax policies. While horizontal equity is concerned with tax filers with similar economic circumstances, vertical equity is concerned with the distribution of taxes across the tax filers of different income levels. Progressive taxes are considered to be vertically equitable because they make up a largest share of income for the highest-income tax filers, who have the greatest ability to pay.
Water’s Edge Election
A provision that allows global corporations to choose to exclude the profits held in their foreign subsidiaries from their total profits before determining the share of their profits that is taxable in California with apportionment formulas. This is in contrast to the default tax filing method for corporations, worldwide combined reporting, which requires corporations to calculate the worldwide profits across all their subsidiaries before apportioning profits among taxing jurisdictions. The water’s edge election allows some corporations to make it appear that they have little or no profits in California by shifting US profits into tax havens abroad — reducing their California tax bills. Corporations electing to file taxes using this water’s edge method must make the election for a seven-year period.
Wealth
The value of the resources that an individual, family, or household owns. Wealth is often measured by net worth, which is the sum of the value of all assets minus all liabilities, or debts, like money owed on loans.
Worldwide Combined Reporting
The default method for corporations to determine their total profits — before determining the share of their profits that is taxable in California with apportionment formulas. This method requires a corporation to combine the profits of the parent company and all its subsidiaries worldwidebefore apportioning profits between taxing jurisdictions. Instead of using the worldwide combined reporting method, corporations can exclude the profits of their foreign subsidiaries when calculating total profits by using the water’s edge election, which can reduce their California taxes.
Building an Affordable California Requires Public Investment
Strengthening California’s revenue base is long overdue — and now, as the federal government abandons its responsibility to support the health and well-being of all Americans, it is more urgent than ever.
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