Billionaire Tax Explained: What Proposition 40 Would Mean for California
Implications of the One-Time Billionaire Wealth Tax for Californians
August 2026 | By the California Budget & Policy Center
key takeaway
Prop. 40 would institute a one-time 5% tax on the wealth of billionaires to raise tens of billions in temporary revenue to address the loss of federal funding and other threats to health, nutrition, and education services, largely a result of H.R. 1 — the 2025 budget reconciliation law known as the “One Big Beautiful Bill Act.” Prop. 40 could potentially raise tens of billions in revenue in the short-term to preserve critical services, but may also lead to some income tax revenue losses in future years to the extent that billionaires leave the state to avoid the tax.
California, like many other states, is facing a number of challenges to its ability to meet the needs of its residents, including the impending impacts of the deep federal cuts to public health care and nutrition assistance and the rising costs of providing services due to inflation, an aging population with more complex needs, and the state’s ongoing housing crisis. The federal cuts to Medi-Cal alone are expected to cost the state tens of billions of dollars in lost funding and could lead to around 1.3 million Californians losing health care access by 2029-30. Meaningfully addressing these challenges will require California to raise a substantial amount of revenue.
what is h.r. 1?
H.R. 1, the 2025 budget reconciliation law known as the “One Big Beautiful Bill Act,” signed by President Trump on July 4, 2025, will deeply harm Californians by cutting funding for essential health care and food assistance programs — while providing massive tax breaks to the wealthy and corporations. The spending cuts will disproportionately impact families with low incomes, immigrants, and communities of color, pushing more people into poverty and widening racial and economic inequities across the state.
Even prior to these more recent challenges, California was not generating enough revenue to meet the critical needs of all Californians through the state’s communities, evidenced by the state’s poverty rate remaining the highest in the nation. In addition to the human suffering caused by failing to ensure Californians can regularly access health care, put enough food on the table, and meet their other basic needs, such a failure dampens the state economy by preventing some individuals from fully participating in it and puts fiscal pressures on state and local governments as more households are forced to turn to costly emergency services and systems of last resort.
In the near term, Prop. 40 would likely generate tens of billions in revenue to prevent health coverage losses for Californians and stabilize the state’s health care system, and could provide additional support for nutrition assistance — which is also impacted by federal cuts — and for public education. Because the revenues would be one-time, the state would not be able to maintain these services in the future unless federal funding were fully restored or the state adopted alternative sources to raise this magnitude of revenue.
There is a strong rationale for taxing accumulated wealth — or taxing increases in wealth that currently go untaxed — given the profound wealth inequality and the vast unmet needs that exist in the state and across the country, as well as the ability of some ultrawealthy households to pay very little in income taxes as a share of their wealth.
At the same time, taxing wealth at the state level comes with some risks, particularly the potential for wealthy people to leave the state to avoid the tax, which would result in future state income tax losses if they did not return — putting at risk future funding for critical state services — and potential unknown impacts on the state economy. Prop. 40 attempts to counter that risk by applying the tax to billionaires who were California residents at the beginning of 2026, however it is likely this will be challenged in courts and the outcome is not certain.
In November, California voters will need to weigh the potential benefits of Prop. 40 against its potential tradeoffs.
Who Would Be Subject to the Tax Under Prop. 40 and How Would It Be Calculated?
Prop. 40 would institute a one-time tax on the worldwide wealth of billionaires. For the purposes of the measure, a billionaire subject to the tax could be an individual, a married couple, or a trust with net worth — as defined by the measure — above $1 billion. There are around 250 billionaires in California, with over $2 trillion in total wealth.1Forbes tracks the daily wealth of billionaires with its “Real-Time Billionaires” list, and the California-specific data was compiled in connection with Jasper Boll, Emmanuel Saez, and Gabriel Zucman, California Billionaires: Wealth, Taxes, and Wealth Tax Revenue Estimates (NBER Working Paper 35218, May 2026). Note: Saez is an author of Prop. 40.
The tax rate would be 5% for most billionaires, but the rate would be phased in for those with net worth between $1 billion and $1.1 billion.2Specifically, the 5% rate would be reduced by 0.1 percentage point for each $2 million that the household’s net worth falls below $1.1 billion. Taxpayers would have the option of paying the full amount of the tax with their 2026 tax returns or in installments across five years, with an annual deferral charge.
Net worth is typically calculated as the total value of assets held by an individual, couple, or family minus their total debts. However, Prop. 40 allows some exclusions from the net worth calculation, including:
Real property holdings, which are subject to constitutional tax limitations due to Proposition 13, approved by California voters in 1978;
Tangible personal property — such as vehicles, jewelry, appliances, or business equipment — held outside of California;3Tangible personal property is excluded from the net worth calculation if it is held outside of California for at least 270 days during 2026 unless it was temporarily relocated for the purpose of tax avoidance. and
Certain pensions, retirement accounts, and deferred compensation arrangements.
The measure would apply the tax to billionaires who were California residents on January 1, 2026, and the amounts subject to the tax would be determined based on their net worth on December 31, 2026. There will likely be legal challenges to the application of the tax based on residency prior to the enactment of the tax. Federal and state tax measures often have retroactivity provisions to minimize tax avoidance and courts have upheld many of these laws, although it is unknown how courts would ultimately rule on this measure. The measure specifies that in the case the residency and valuation dates are invalidated by courts, these dates shall be construed to be the earliest dates consistent with law.
Prop. 40 establishes procedures for estimating the value of various types of assets that would be included in net worth for the purpose of the tax. Valuation is simple for some assets, such as holdings of publicly traded stock, which have a known market value at any given time. Other assets, such as shares of private businesses, intellectual property such as copyrights or trademarks, and artwork, are more difficult to value without a sale taking place. The measure has detailed valuation rules and formulas for different types of assets, and both the taxpayer and the state’s Franchise Tax Board — which would be responsible for administering the tax — could obtain certified appraisals in the case of valuation disputes. Additionally, the measure contains provisions intended to minimize the ability of taxpayers to avoid or evade their tax responsibility.4Tax avoidance reflects legal avenues to reducing tax liability, such as redirecting wealth holdings to exempted assets or relocating, whereas tax evasion encompasses illegal tactics to avoid taxes, such as hiding assets in tax havens, underreporting of asset values, or falsely claiming residency outside of the tax jurisdiction.
Example: Potential Impact of Prop. 40 on Mark Zuckerberg
Mark Zuckerberg, cofounder of Facebook, has a net worth of around $200 billion. Assuming he has approximately $200 billion in wealth subject to Prop. 40 on December 31, 2026, when net worth is to be determined for the purpose of the measure, he would owe around $10 billion in tax, which he could pay in five annual installments of $2 billion. His remaining wealth of around $190 billion would still be more than the entire economies of dozens of countries, roughly on par with the Gross Domestic Product of Morocco.
For comparison, Zuckerberg’s net worth increased 175% from 2023 to 2024 according to Forbes data, from $64.4 billion to $177 billion.
What Is the Difference Between Income and Wealth?
Capital Gains: Increases in Wealth
Households holding assets that have increased in value pay federal and state tax on those gains only when they sell those assets. This is known as a realized capital gain.
However, the value of an asset can grow exponentially and go untaxed as long as it is held onto — an unrealized capital gain. While the household doesn’t directly receive the proceeds from the gain until selling the asset, unrealized capital gains represent an increase in the household’s wealth and financial well-being.
For ultra-wealthy households, unrealized capital gains make up a large share of their total wealth.5For example, the Institute on Taxation and Economic Policy estimated that unrealized capital gains represent nearly 70% of total wealth for billionaires. In some cases, ultra-wealthy households — such as corporate founders — can avoid paying income taxes entirely in some years by not taking a salary, not selling any stocks or other assets, and simply borrowing against their wealth to pay their bills. There is evidence of some of the wealthiest Americans engaging in this behavior, detailed in analyses of leaked tax returns by investigative journalists,although recent research suggests that this is not a widespread phenomenon and that overall, wealthy households do have significant taxable income and their incomes allow them to cover their expenses while continuing to invest and grow their wealth.
Additionally, if someone holds onto assets until their death, their heirs do not have to pay any tax on the gain due to a provision in both federal and state law known as “stepped-up basis,” estimated to cost California around $5 billion each year.6Department of Finance, Tax Expenditure Report: 2025-26, p. 24. Note that the estimated annual cost of the provision is not equivalent to the revenue that could be generated from repealing it, and for this provision the revenue gains from repeal would start in the low hundreds of millions and increase with time, potentially reaching $5 billion annually in the future. Essentially, the combination of unrealized capital gains not being taxed and stepped-up basis results in some large wealth increases never being taxed.
How Is Wealth Distributed Across California?
Across the country, the gaps in income and wealth have steadily grown with the top 10% of households seeing substantial growth in both income and wealth accumulation. Similarly, in California, only a tiny fraction of the population benefits from extreme income and wealth.
When focusing on the wealth distribution in the state, the data show an alarming gap between households with high and low wealth. Specifically, the wealthiest 20% of households have a net worth of over $1.5 million, while the bottom 20% of households have a net worth of $13,000 or less. Those who would be subject to the Prop. 40 tax — those with a net worth above $1 billion — have a net worth of over 3,000 times the median household.
Wealth is also unequally distributed across racial and ethnic groups. For example, the median net worth of white households in 2023 was almost ten times the median net worth of Latinx households, reflecting the historical barriers to wealth accumulation these communities have faced. Black, Latinx, and other households of color often have less wealth due to many factors including a lower likelihood of owning stocks, occupational segregation pushing them into lower-payer jobs, and a lack of inherited generational wealth. These factors likely contribute to the large wealth disparities that have persisted throughout history.
How Much Revenue Will Prop. 40 Raise?
There is a high degree of uncertainty in estimating the potential revenue from this measure since it is impossible to accurately predict how billionaires and the courts will respond to the tax. It is likely there will be some avoidance and evasion of the tax, as billionaires may hide or underreport their assets, shift their asset holdings toward those that are exempt from the tax, attempt to sever their ties with California, or engage in other tactics to minimize or eliminate their tax liability.
After attempting to account for these factors, the Legislative Analyst’s Office estimates that the billionaire tax would likely raise “tens of billions” of dollars in the near term. It also suggests there could be some ongoing reductions in state income tax collections in the future — likely less than $1 billion per year — depending on the extent to which billionaires leave the state and no longer pay California tax on their income.
Authors of Prop. 40 estimate that the measure could raise around $100 billion over five years, after assuming that 10% of the potential tax base would be eroded due to avoidance and evasion. They assume a relatively low avoidance and evasion rate due to the one-time nature of the tax and its retroactive residency date as well as the inclusion of provisions in the measure intended to safeguard against the avoidance and evasion strategies seen with wealth taxes implemented in other countries, such as allowing fewer exemptions for certain asset types and applying the tax to trusts as well as individuals.
The large difference between estimates lies mainly in different assumptions about how many billionaires have or will successfully sever their residency ties with California to avoid the tax. The potential for migration and other avoidance efforts related to the measure and their implications are discussed below.
What Would Prop. 40 Funds Pay For?
All the revenue from the Billionaire Tax Act is intended to mitigate the harm from federal and state-level cuts to health care, food assistance, and K-14 public education programs. The measure would create a special fund — the 2026 Billionaire Tax Reserve Fund — to hold the revenue.
Revenues in the fund — after accounting for the costs incurred by the Franchise Tax Board to administer the tax — would be split between two subaccounts, with 90% of revenue going into the Billionaire Tax Health Account and 10% going into the Billionaire Tax Education and Food Assistance Account.
Dollars in the Billionaire Tax Health Account would support health care funding, which could include but is not limited to:
Restoring or addressing any reductions in federal or state funding to health care programs;
Protecting and expanding Medi-Cal and other health coverage programs for low- and moderate-income Californians;
Supporting safety net health care providers serving vulnerable populations; and
Other investments relating to health care access, coverage, benefits, funding, services, and payments to providers.
Dollars in the Billionaire Tax Education and Food Assistance Account would support funding for K-14 and food assistance programs, which could include but is not limited to:
Restoring or addressing any reductions in federal or state funding to public education and food assistance programs;
Making investments to preserve or expand the K-14 education system; and
Expanding food programs like CalFresh, the California Food Assistance Program, CalFood, and the California Universal Meals Program.
Because the measure does not contain specific requirements as to how the dollars within each fund must be spent, beyond being used for “health care funding” and “education-related and food assistance expenditures,” policymakers would have fairly broad authority to determine the allocation of funding within those categories. However, the measure specifies that funds may not be used to replace existing state funds for health care, education, or food assistance.
Additionally, each subaccount has a limit for how much can be appropriated in a fiscal year. The health subaccount has an appropriation limit of $22.5 billion per fiscal year, and the education and food assistance account has a limit of $2.5 billion per fiscal year. The entire amount does not have to be allocated each year and funds can be retained if determined necessary.
Prop. 40 specifies that the revenue generated by the billionaire tax would be excluded from three spending requirements in the state Constitution:
the state spending cap (Prop. 4, the “Gann Limit”), which restricts the usage of revenues above a certain level, based on spending in 1978-79 adjusted for changes in population and income.
How Would Prop. 40 Revenues Impact Californians?
The majority of the revenues from the Billionaire Tax Act would directly support Californians who are harmed by federal and state cuts to the Medi-Cal and CalFresh programs.
H.R.1 is estimated to result in around 1.3 million Californians losing Medi-Cal coverage by 2029-30 and tens of billions of dollars in lost federal funding every year. These provisions target a wide range of populations including, but not limited to, immigrant Californians and low-income adults without dependents. Policy changes impacting these populations include increasing eligibility checks for Medi-Cal, imposing ineffective work reporting requirements, and limiting retroactive coverage for adults. Federal policy changes, including provisions of H.R. 1 and the expiration of enhanced premium tax credits, could also result in around 400,000 to 500,000 fewer Californians receiving health coverage through Covered California — the state’s health insurance marketplace established through the Affordable Care Act. The revenue from Prop. 40 could help mitigate some of the harms of these federal policies, for instance by replacing some lost federal funding and providing counties with additional resources to administer Medi-Cal and help eligible Californians maintain coverage.
This measure could also allocate funding to counteract the harmful enacted provisions from recent state budget packages that further harm Medi-Cal recipients. In combination with the federal cuts, state policy changes like freezing Medi-Cal enrollment for certain undocumented adults, imposing burdensome monthly premiums, reinstating the Medi-Cal asset limit, and denying full-scope Medi-Cal to certain immigrants could nearly double the uninsured rate to 14.7% by 2030.
A smaller proportion of the revenue could also go towards offsetting H.R.1’s harmful cuts to CalFresh. H.R.1 puts more than 3 million households at risk of losing some or all of their food assistance and could cost California between $2.3 billion and $5.1 billion annually. The provisions include applying time limits to previously exempt populations like veterans, older adults, and former foster youth and eliminating CalFresh for tens of thousands of lawfully present immigrants.
The Prop. 40 revenues could also help sustain and support funding for public education which has been facing federal threats such as funding freezes, grant cancellations, and proposed budget cuts. Public education would receive less support under the measure than if the revenues were allocated to the General Fund — due to the Prop. 98 minimum funding guarantee — but that would also mean less funding available for health care and food assistance. Additionally, because the measure does not require any specific share of funding in the Billionaire Tax Education and Food Assistance Account to go to any of the specified allowable uses, it is possible that all of these funds would be used to support food assistance and none for education — or alternatively, all of the funds could go to education and none to food assistance. Again, policymakers would have significant flexibility in allocating the dollars in this fund to specific programs that align with the intended purposes of the fund.
What Are the Concerns About Prop. 40?
Prop. 40 Would Provide One-Time Revenues to Respond to Ongoing Federal Funding Losses
While the revenue that would be generated by Prop. 40 is mainly intended to address the harms of the federal cuts to health care and food assistance resulting from H.R. 1 and other federal threats, the revenue from this one-time tax would only be available for a few years. If the federal government does not reverse those deep cuts within the next several years, the state will again be presented with the choice of cutting services and letting Californians impacted by federal cuts fall through the cracks or finding new alternative revenue sources to help keep them afloat.
The Revenue from Prop. 40 Would Not Be Available to Support Other Core State Services
Because the revenue would be earmarked, state programs and services that help Californians — beyond health care, food assistance, and education — would not receive any of the one-time revenue under Prop. 40. For example, none of the revenue would be available to support other critical needs such as affordable housing and renter supports, homelessness response, subsidized child care, or other safety net programs. As noted above, because the measure does not specify how the funds in the Education and Food Assistance Account would be allocated, it is possible that the funds could be used only for food assistance or only for education, so there is no guarantee that funding is allocated for both of these purposes.
On one hand, there is a clear need for increased health care funding to respond to the dramatic federal cuts that could strip millions of Californians of their health insurance and put immense strain on health clinics and hospitals, particularly in rural areas. This need supports the rationale for dedicating the vast majority of the revenue to health care programs.
On the other hand, Californians facing barriers to economic security have many critical needs, and the state has long underinvested in meeting those needs. New revenues are essential to protect and expand vital state services — including services beyond what Prop. 40 revenues are allowed to fund. If the revenues from a new tax on wealth went into the state’s General Fund, policymakers would have the flexibility to deliberate and decide how to allocate funding to address the most pressing and changing needs of Californians.
There Are Uncertain Impacts of a State-Level Wealth Tax on the State’s Longer-Term Budget and Economy
Imposing a state tax on wealth for a small share of the population is a novel and untested approach in the United States, and novel approaches always come with some risks. Concerns have often been raised about the potential impacts of such a tax on the behavior of the ultra-wealthy: the extent to which they will engage in tax avoidance behaviors that have consequences for the state. The majority of these concerns focus on the risk that billionaires will leave the state to avoid the tax, which would lead to some loss of future income tax revenues from those households if they do not return later. A related concern often raised is how these potential migration impacts could affect the state’s economy if wealthy business founders/owners choose to relocate some of their business activities or if future company founders opt to start businesses in another state for fear of a future wealth tax.
While a significant outmigration of billionaires could reduce the one-time revenue yield from the billionaire tax, the bigger concern for the state is the potential impact on ongoing state income tax revenues, which could put a strain on the state budget in the future. The outcome here is also uncertain. The income taxes paid by billionaires are very small relative to their overall wealth, and some billionaires can essentially avoid income taxes entirely in some years by not selling any assets or receiving a salary. For example, researchers — including an author of Prop. 40 — examined public data reported to the US Securities and Exchange Commission and found that Google founders Larry Page and Sergey Brin did not sell stock, receive dividends, or take any compensation related to Alphabet (Google’s parent company) in 2019, 2020, or 2023, so they likely would not have paid any income taxes related to their Alphabet holdings or involvement. Additionally, it is not clear that migration and income tax losses would be permanent in response to a one-time tax.
Prop. 40 aims to address the potential concerns about migration by applying the wealth tax to billionaires who were California residents as of January 1, 2026. This retroactive residency date is likely to be challenged in court. However, if it is upheld, any billionaire leaving after this date would not be able to avoid the tax. Additionally, even billionaires who announced moves out of California before this date may not have sufficiently severed their residency with the state for tax purposes, as the state’s Franchise Tax Board considers many factors when verifying residency status beyond simply whether a filer claims to be resident of another state or has purchased property in another state.
There is no way to accurately predict how billionaires would respond to the tax — or the prospect of being subject to the tax, as there is uncertainty about whether the measure will be approved by voters and whether the retroactive residency date will be upheld. There is a body of research on how income and wealth tax policies may impact interstate and international mobility of taxpayers, but the findings vary widely depending on the geographical scope, the type and magnitude of the tax change, the population impacted, the data available, and the research methodology.7For a summary of research focused on the mobility of high-income and high-wealth households in response to income and wealth taxes, see Fernando Rodrigo Sauco, “Millionaires on the Run? Taxation of the Rich and Induced Mobility: A Literature Review,” Hacienda Pública Española/Review of Public Economics 253, no. 2 (June 2025): 91-127.
Research on the impacts of state-level income taxes on interstate migration has generally found very minor effects on the numbers of high-income people in a state relative to the state’s total population of high-income people.8While some studies have found statistically significant effects of taxes on migration rates among high-income tax filers, this translates to small changes in the stock of high-income people in a state. For example, Young et al. (2016) examined federal tax return data for all tax filers with incomes of at least $1 million across all states for 1999 to 2011 and estimated that a one percentage point increase in the income tax rates is associated with an 8% reduction in the net migration flows into the state — people moving in minus people moving out — but this only translates to only a 0.1% change in the population of millionaires. They also find that while millionaires are somewhat more sensitive to tax rates than the general population, they are also less likely to move between states overall. Rauh and Shyu (2024) examined the impacts of California’s income tax increases on high-income households enacted by Prop. 30 (2012) and estimated that the the tax increase was associated with a one-time increase in the outmigration rate of top-tax bracket filers of 0.8% — translating to around 535 out of the nearly 67,000 tax filers in the new top tax bracket. Notably, since the enactment of these top tax rates established by Prop. 30 and extended by Prop. 55 (2016), the numbers of tax filers with incomes placing them in these top tax brackets has grown significantly, along with the incomes of this group and the state revenue collections from the top rates. Additionally, there is evidence that state differences in tax rates have more significant effects on the choice of location among movers than on the probability of moving. For example, a study by Young and Lurie (2025) suggests millionaires in higher-tax states were no more likely to move than the general public in response to a 2017 federal tax change that impacted higher-income taxpayers in higher-tax states, but those that did move were more likely to move to lower-tax states. While taxes may be one factor in where people decide to live, they are one of many, and they may not outweigh other factors such as professional and family considerations, public amenities, weather, and lifestyle preferences. Indeed, survey data from the US Census Bureau show that the vast majority of people moving between states move for job or family reasons. Some research also finds that high-income people are generally less likely to move between states than the general population and are more embedded in their communities due to family, social, and business connections — they are more likely to be married, have children, and own businesses.9Young and Lurie (2025) did find an elevated migration of millionaires out of higher-tax states during the COVID pandemic when in-person social and business networks were disrupted, but this effect had generally subsided by the beginning of 2023.
However, the impact of a wealth tax on California billionaires may be different than the impact of income taxes on high-income households. There are no direct parallels to draw on, as no state has enacted this type of tax, and most wealth taxes in other countries have been imposed at the national level and applied to a broader segment of the population. These other wealth taxes have had substantial differences in design — including the tax rates, exemptions for specific types of assets, and the wealth thresholds above which the tax applies — as well as enforcement capacity. All of these factors can influence the impact of the tax, so the findings on migration and other avoidance behaviors are not uniform across studies of different wealth taxes and may not be directly relevant to the potential impact of a California billionaire tax.
Several countries, mainly in Europe, have levied taxes on their residents’ net worth in the past, but most have since repealed them. Among high-income countries — members of the Organization for Economic Cooperation and Development (OECD) — four currently impose taxes on wealth: Colombia, Norway, Spain, and Switzerland. This is down from 12 OECD countries with wealth taxes in 1990. A few other countries still have fairly comprehensive taxes on wealth — including Argentina (althougFor example, the Spain wealth tax study did find higher responses for people in higher wealth tax brackets, and a study on the impact of state-level estate taxes — essentially a one-time wealth tax levied when someone dies — on the state residence of US billionaires in the Forbes 400 found this population to be quite sensitive to the presence of an estate tax. However, this finding may not extend to a one-time wealth tax given that people are more likely to be mobile after retirement and may factor estate planning into their location decisions — and the estate tax study did find a stronger response for older billionaires.h this tax is being phased down), Bolivia, Uruguay — and additional countries including Belgium and Italy have taxes on the value of narrower categories of assets.10Washington State Department of Revenue, Wealth Tax Study Report(November 2024); PwC, Worldwide Tax Summaries: Net wealth/worth tax rates (Accessed July 6, 2026). Italy levies a 0.2% tax on foreign financial assets, and Belgium levies a 0.15% tax on securities accounts of at least 1 million euros.
Studies on wealth taxes in Spain and Switzerland — the only countries that have subnational wealth tax regimes instead of uniform national wealth taxes — found migration responses related to variation in tax rates between regions. The studies estimate that a one percentage point change in a wealth tax rate was associated with a change of around 8% to 10% in the population impacted by the tax. If billionaires in California had a similar response, a 5% wealth tax could result in substantial outmigration.
However, there are some caveats to extrapolating these findings — beyond the retroactive residency provision in Prop. 40 that may render billionaire outmigration after January 1, 2026 moot for the purpose of the tax. The subdivisions of Spain and Switzerland are much smaller than California, the taxes are ongoing instead of one-time, they are present across most or all regions of the countries, and they apply to a much broader population than billionaires — these factors could pull in opposite directions with regard to the applicability of these findings. It is also likely that some of the reported residence changes are fraudulent. Researchers found some suggestive evidence that false residency changes — such as a taxpayer claiming that a second home is their primary home — are responsible for some of the effect in Spain. The prevalence of this phenomenon could be limited with adequate enforcement.
There is a possibility that wealthier people are more likely to move in response to taxes, which would have implications for a tax specifically targeted to billionaires.
For example, the Spain wealth tax study did find higher responses for people in higher wealth tax brackets, and a study on the impact of state-level estate taxes — essentially a one-time wealth tax levied when someone dies — on the state residence of US billionaires in the Forbes 400 found this population to be quite sensitive to the presence of an estate tax.11Note that this finding is specific to the ultra-wealthy Forbes 400 group, so it cannot be generalized to a broader group of wealthy households. Previous research examining the effect of estate and inheritance taxes on state migration rates of older adults and the locations of wealthy older adults estimated insignificant or modest effects. However, this finding may not extend to a one-time wealth tax given that people are more likely to be mobile after retirement and may factor estate planning into their location decisions — and the estate tax study did find a stronger response for older billionaires.
There is limited research on the overall economic impacts of wealth taxes. One recent study on now-repealed national-level wealth taxes in Sweden and Denmark — looking at the effects of tax reductions and repeals — estimated that a one percentage point increase in top wealth tax rates decreases the number of wealthy taxpayers in the country by about 2%, and because the wealthy are disproportionately business owners, there are some broader economic impacts. However, the estimated effects were very modest, as a large portion of business activity lost due to the outmigration of business owners is absorbed by other remaining businesses. Again, the differences in geography, nature of the tax changes studied (tax cuts versus tax increases), and the fact that these were recurring rather than one-time taxes mean that these findings may not be generalizable to a one-time state-level tax.
Research on one-time or temporary wealth taxes is limited. Several countries in Europe enacted national-level, short-term wealth taxes in the wake of WWI and WWII, and some levied narrow temporary taxes targeting wealth holdings after the Great Recession, with varying levels of success depending on the circumstances. The vast differences in historical context, geographic focus, and design elements — such as tax rates, payment periods, exemption levels, and assets targeted — make these experiences not particularly relevant comparisons for the Prop. 40 proposal, and there has not been empirical research on the migration or general economic impacts of these temporary taxes.
In sum, although existing research can provide some insights into the potential impacts of a one-time California billionaire wealth tax, there are many unknowns given the unique nature of the proposal. Additionally, the findings from research on tax policy impacts may not always identify causality or precisely measure effects due to the many potential confounding factors. Finally, even if effects are precisely measured, the research attempts to isolate the effects of tax policies holding all else equal, when in the real world there are a variety of factors influencing location decisions beyond taxes. Ultimately, California voters will need to decide if the benefits of the revenue generated by a tax on billionaires outweigh the concerns about the uncertain future fiscal and economic effects.
Which Other Measures on the November Ballot Conflict with Prop. 40?
Two other constitutional amendment measures appearing on the November ballot, Prop. 41 and Prop. 42, contain provisions that conflict with Prop. 40 and could invalidate it in part or in full if they receive more votes. These measures could also make it harder to raise state revenues in the future to invest in the well-being of Californians, which could result in cuts to essential services that Californians want and need.
Proposition 41
Prop. 41 would:
Require the State Auditor to conduct audits of programs that would receive revenue from new or higher special taxes, which are taxes that are dedicated to specific purposes rather than going into the state’s General Fund. This would include ongoing audits — every four years — of programs receiving funds from special taxes enacted on January 1, 2026 or later by either the Legislature or state voters. Additionally, pre-election audits would be required for programs that would receive revenues from a new or increased special tax that would appear on the statewide ballot. The pre-ballot and ongoing audits would be required to, among other things, contain recommendations on how the programs could reduce its costs by at least 10% annually. Policymakers would be under no obligation to implement these recommendations, but if they did, it could result in cuts to core services rather than simply “inefficient spending.”
Prohibit revenues raised by special taxes enacted since January 1, 2026 from being excluded from the state’s spending cap, also known as the “Gann Limit.” The measure also specifies that if another measure on the same ballot imposes a tax and exempts its revenues from the Gann Limit, the entirety of the other measure would be invalidated if Prop. 41 receives more votes. However, this would not prevent voters from approving future amendments to the state Constitution that would exclude certain tax revenues from the Gann Limit.
Because Prop. 40 would exclude the revenue generated by the billionaire tax from the Gann Limit, this is in direct conflict with Prop. 41. If both measures are approved, but Prop. 41 receives more votes, Prop. 40 could be invalidated. Alternatively, if both measures pass but Prop. 40 receives more votes, the billionaire tax could be collected, but it is possible that audits would be required of Medi-Cal and other programs receiving Prop. 40 dollars. If both measures pass, there may be litigation regarding the application of conflicting provisions, and the final decision would be made by the courts.
Proposition 42
Prop. 42 would:
Prohibit the imposition of any new tax on the ownership of financial assets (such as bank accounts, stocks, bonds, or mutual funds), retirement accounts, interests in businesses, intellectual property, and other personal property (such as vehicles, jewelry, artwork, and other movable, physical property). Essentially, this would limit the taxation of assets to real estate assets, which are already subject to constitutional tax limitations under Prop. 13. However, if this measure is passed, it would not prevent voters from amending the state Constitution to tax any of these assets in the future, but state policymakers would not be able to enact taxes on any of the assets covered by Prop. 42 without voter approval.
Prohibit the imposition of new retroactive taxes, and in particular taxes based on residency prior to the effective date of the new tax — except in cases where the revenues would be used to respond to a governor-declared emergency and the tax does not apply retroactively for more than one year before the effective date. Once again, the approval of Prop. 42 would not impact the ability of voters to approve retroactive taxes in the future, but would impact state policymakers’ ability to do so. As noted above, many tax laws do have limited retroactivity periods — such as dating back to the beginning of a tax year — for several reasons, including preventing tax avoidance.
Both of these provisions conflict with Prop. 40, as the billionaire tax would apply to financial assets, business interests, and other personal property, and it would be retroactively based on the taxpayer’s residence as of January 1, 2026. If both measures pass and Prop. 42 receives more votes, Prop. 40 could be invalidated. If Prop. 40 receives more votes, the wealth tax could be collected, but Prop. 42’s tax restrictions would likely apply to future legislative tax proposals. Again, conflicts may ultimately be decided in courts if both measures pass.
The Bottom Line on Prop. 40
Prop. 40 is a bold proposal that would create a first-in-the-nation tax on wealth, raising significant — temporary — revenue by taxing the fortunes of California’s more than 250 billionaires. Proponents argue this unprecedented measure is needed to help offset deep federal cuts and protect health care, food assistance, and education for all Californians. Because a wealth tax is untested at a state level in the United States, it carries real uncertainty: courts may strike down the measure or portions of it, conflicting measures could lead to years of litigation, and no one can say how the location decisions of billionaires might change and what that would mean for California’s long-term finances.
California voters will need to decide if the benefits of the revenue generated by a tax on billionaires outweigh the concerns about the uncertain future fiscal and economic effects of the billionaires tax.
Prop. 40 Supporters and Opponents
Prop. 40 is sponsored by Service Employees International Union — United Healthcare Workers West (SEIU-UHW), a local union representing health care workers. It has been endorsed by labor organizations including AFSCME California and Teamsters California, organizations including Our Revolution and California Democratic Socialists of America, and policymakers including US Senator Bernie Sanders, US Representative Ro Khanna, and State Superintendent of Public Instruction and former gubernatorial candidate Tony Thurmond.
Prop. 40 is opposed by labor organizations including the California Teachers Association and the State Building and Construction Trades Council of California, organizations including the California Business Roundtable, the California Medical Association, Planned Parenthood Affiliates of California, policymakers including Governor Gavin Newsom and US Representative Kevin Kiley, and gubernatorial candidates Xavier Becerra and Steve Hilton.
The California Budget & Policy Center is a nonpartisan research and analysis nonprofit and does not endorse or oppose ballot measures. This analysis reflects the institutional position of the Budget Center, developed and reviewed by our policy leadership team.
Kayla Kitson and Nishi Nair contributed to this publication.
Forbes tracks the daily wealth of billionaires with its “Real-Time Billionaires” list, and the California-specific data was compiled in connection with Jasper Boll, Emmanuel Saez, and Gabriel Zucman, California Billionaires: Wealth, Taxes, and Wealth Tax Revenue Estimates (NBER Working Paper 35218, May 2026). Note: Saez is an author of Prop. 40.
2
Specifically, the 5% rate would be reduced by 0.1 percentage point for each $2 million that the household’s net worth falls below $1.1 billion.
3
Tangible personal property is excluded from the net worth calculation if it is held outside of California for at least 270 days during 2026 unless it was temporarily relocated for the purpose of tax avoidance.
4
Tax avoidance reflects legal avenues to reducing tax liability, such as redirecting wealth holdings to exempted assets or relocating, whereas tax evasion encompasses illegal tactics to avoid taxes, such as hiding assets in tax havens, underreporting of asset values, or falsely claiming residency outside of the tax jurisdiction.
Department of Finance, Tax Expenditure Report: 2025-26, p. 24. Note that the estimated annual cost of the provision is not equivalent to the revenue that could be generated from repealing it, and for this provision the revenue gains from repeal would start in the low hundreds of millions and increase with time, potentially reaching $5 billion annually in the future.
While some studies have found statistically significant effects of taxes on migration rates among high-income tax filers, this translates to small changes in the stock of high-income people in a state. For example, Young et al. (2016) examined federal tax return data for all tax filers with incomes of at least $1 million across all states for 1999 to 2011 and estimated that a one percentage point increase in the income tax rates is associated with an 8% reduction in the net migration flows into the state — people moving in minus people moving out — but this only translates to only a 0.1% change in the population of millionaires. They also find that while millionaires are somewhat more sensitive to tax rates than the general population, they are also less likely to move between states overall. Rauh and Shyu (2024) examined the impacts of California’s income tax increases on high-income households enacted by Prop. 30 (2012) and estimated that the the tax increase was associated with a one-time increase in the outmigration rate of top-tax bracket filers of 0.8% — translating to around 535 out of the nearly 67,000 tax filers in the new top tax bracket. Notably, since the enactment of these top tax rates established by Prop. 30 and extended by Prop. 55 (2016), the numbers of tax filers with incomes placing them in these top tax brackets has grown significantly, along with the incomes of this group and the state revenue collections from the top rates. Additionally, there is evidence that state differences in tax rates have more significant effects on the choice of location among movers than on the probability of moving. For example, a study by Young and Lurie (2025) suggests millionaires in higher-tax states were no more likely to move than the general public in response to a 2017 federal tax change that impacted higher-income taxpayers in higher-tax states, but those that did move were more likely to move to lower-tax states.
9
Young and Lurie (2025) did find an elevated migration of millionaires out of higher-tax states during the COVID pandemic when in-person social and business networks were disrupted, but this effect had generally subsided by the beginning of 2023.
10
Washington State Department of Revenue, Wealth Tax Study Report(November 2024); PwC, Worldwide Tax Summaries: Net wealth/worth tax rates (Accessed July 6, 2026). Italy levies a 0.2% tax on foreign financial assets, and Belgium levies a 0.15% tax on securities accounts of at least 1 million euros.
11
Note that this finding is specific to the ultra-wealthy Forbes 400 group, so it cannot be generalized to a broader group of wealthy households. Previous research examining the effect of estate and inheritance taxes on state migration rates of older adults and the locations of wealthy older adults estimated insignificant or modest effects.
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key takeaway
Proposition 37 on the November 2026 ballot would establish a “middle-class” homebuyer downpayment assistance program, funded with up to $25 billion in revenue bonds. This assistance could only be used to purchase newly built homes or newly created housing units converted from nonresidential buildings, where the buyer is the first purchaser. The program is intended to be self-sustaining because participating homebuyers — not the state — would ultimately repay the bonds through their mortgage payments.
Supporting homeownership is an important strategy for promoting economic security and wealth building. However, it is unclear whether Prop. 37 would meaningfully help “middle class” Californians who face the greatest barriers to homeownership to afford a home.
As Prop. 37 would be financed through revenue bonds — which do not require voter approval — the program proposed by this initiative could have been enacted legislatively or a comparable program could have been established by the California Finance Housing Agency. Prop. 37 is a citizens’ initiative spearheaded by former California Senate Majority Leader and Assembly Speaker Bob Hertzberg.
What Would Prop. 37 Do?
The Middle Class Homeownership and Family Home Construction Act of 2026 would direct the California Housing Finance Agency (CalHFA) to establish a middle-class homebuyer downpayment assistance program, funded with up to $25 billion in revenue bonds. The new program would: Key components of the program include:
Provide up to 17% of the purchase price toward the down payment, which could only be used to purchase new homes or newly created housing units converted from nonresidential buildings, where the buyer is the first purchaser.
Require the buyer to put down at least 3% of the purchase price toward the down payment. Combined with the 17% state downpayment assistance, this would reach 20% of the home’s purchase price and eliminates the need for private mortgage insurance. A conventional first mortgage would cover the remaining amount.
Require the downpayment assistance to be provided as a loan, not a grant, which recipients are likely to pay back monthly as a fixed-rate second mortgage. This would be in addition to the homebuyer’s monthly payments on their conventional first mortgage.
Allow applicants to have incomes up to 200% of the Area Median Income (AMI), which varies by region.
Cap the maximum home purchase price at roughly $1 million to $1.5 million, depending on the county and other factors. This is equivalent to a $170,000-$255,000 downpayment assistance cap per home.
Not require applicants to be first-time or first-generation home buyers, nor would recipients owe the state any equity gained in their home. These are requirements of comparable state downpayment assistance programs the state currently operates.
Allow home builders to become “qualified builders,” and have their developments automatically qualify for the program if they meet specified labor and enforcement standards.
How Would Income Eligibility for Prop. 37’s Downpayment Assistance Vary Across California Counties?
Prop. 37 would make a broad group of Californians eligible for downpayment assistance by allowing family incomes not exceeding 200% of Area Median Income (AMI) to qualify, a threshold that extends well beyond established downpayment assistance programs.
AMI represents the midpoint of family incomes in a specific area, adjusted for household size. In other words, half of households in an area have incomes that exceed 100% AMI and half have incomes below that level, so 200% AMI is roughly double what a typical family makes in the area. The limit is tied to local incomes, so whether a family income would qualify for Prop. 37’s downpayment assistance would vary significantly across California.
For example, a Budget Center analysis of Census Bureau data shows that a family of four earning up to $166,800 annually in Madera County or up to $375,800 annually in Santa Clara County could each qualify for assistance. However, the final dollar amounts would be set by CalHFA if Prop. 37 is approved by voters.
How Is Prop. 37 Different from California’s Existing Downpayment Assistance Programs?
California operates several statewide homeownership programs through CalHFA, but Prop. 37 would take a different approach that could hit family budgets harder, as participants are likely to pay back the downpayment assistance monthly as a fixed-rate second mortgage.
For example, CalHFA’s MyHome Assistance Program and the Dream for All Shared Appreciation Loan program both provide downpayment assistance through deferred “silent second” loans (also known as silent second mortgages). MyHome charges 1% simple interest on the assistance; Dream for All accrues no interest, but requires a 15% or 20% share of the home’s appreciation to go to the state. Under both programs, nothing is due on these silent second mortgages until the homeowner sells, refinances, or pays off the first mortgage. This ensures that the downpayment assistance doesn’t compete with the first mortgage, groceries, utility bills, or other basic needs in a family’s monthly budget.
Prop. 37’s approach is likely to require monthly payments. This is because CalHFA would issue up to $25 billion in revenue bonds, and by law those bonds must be repaid from the proceeds of the program itself — meaning the principal and interest of the second mortgages CalHFA issues. The second mortgages would need to generate steady, ongoing revenue to pay the debt from the revenue bonds. Language in the measure also states “a borrower may request a temporary hardship deferral of monthly interest payments on its middle-class homeownership loan,” further alluding to its intended structure.
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Under Prop. 37, the second mortgage payment could also likely carry higher interest rates above conventional first mortgage rates. Although the measure states the intent to provide below-market downpayment assistance financing, it doesn’t guarantee it. The interest rate on the second mortgages would ultimately depend on the terms under which the bonds are issued and market conditions at the time of implementation, which are largely outside CalHFA’s control.
Revenue bonds that finance second mortgages are inherently riskier for investors because if a homeowner defaults, the first mortgage gets repaid before the second, leaving the bond investors more exposed to loss. Investors may therefore require a higher return to compensate for that additional risk, which could increase the interest rate on the second mortgage. This means Prop. 37’s second mortgage rate could land above the roughly 6.5% conventional first-mortgage rates buyers already face today. CalHFA wouldn’t set the actual rate or terms on the second mortgage until implementation, so the interest rate cannot be known before voters decide on Prop. 37.
Ultimately, while Prop. 37 could help get homebuyers to a 20% downpayment to avoid private mortgage insurance, the monthly repayment costs for the second mortgage could erode much of the benefit the downpayment assistance was meant to provide.
Would Prop. 37 Reach “Middle-Class” Californians Facing the Greatest Barriers to Homeownership?
Prop. 37 would make a broad range of households eligible for downpayment assistance, but income eligibility alone does not determine who can realistically purchase a home. Racial and ethnic disparities in income, wealth, credit access, and housing affordability mean that not all eligible families across California may be positioned to benefit from the program as proposed.
Prop. 37 would require the buyer to put down at least 3% of the purchase price, which would still be unattainable for many Californians. For example:
A house that costs $500,000 would require a 3% down payment of $15,000.
A house that costs $700,000 would require a 3% down payment of $21,000.
These upfront costs could be out of reach for many families, with the result that Prop. 37’s assistance could largely benefit families with incomes toward the higher end of the eligibility range. According to the Public Policy Institute of California, the median amount in Californians’ checking and savings accounts was just over $18,000 in 2025 dollars. This means that a 3% down payment could still almost or entirely clear out most or all of what an average family has in checkings and savings.
Prop. 37 could also reinforce economic, racial, and ethnic inequities in homeownership. The measure is intended to help “middle class” Californians, roughly defined as those with incomes between 80% to 200% AMI. White families are overrepresented among middle- and upper-middle-income Californians (46%), compared to their share of all California families (42%).
In contrast, Black and Latinx families are underrepresented in this “middle class” income range. This means that white families could disproportionately benefit from this program — even though white households already make up the largest share of homeowners in the state, while Black and Latinx renter households face disproportionately high housing costs.
Prop. 37 does not require applicants to be first-time or first-generation home buyers, further exacerbating equity concerns. Black and brown communities have been historically excluded from building wealth and accumulating assets, making the barrier to entering the housing market even more pronounced. Families of color face occupational segregation that pushes them into lower-paying jobs. They are also less likely to inherit generational wealth, and are more likely to be renters. These factors make it substantially more difficult to save for a down payment, even at similar income levels. Additionally, data limitations often mask significant disparities in homeownership access across racial and ethnic groups, especially among Asian American, Native Hawaiian, and Pacific Islander Californians.
Could Prop. 37 Encourage Sprawl and Harm the Environment?
By restricting downpayment assistance to newly built homes or newly created housing units converted from nonresidential buildings, Prop. 37 could push more “middle-class” housing onto land that’s not well suited for housing. Much of the land in California best suited for housing has already been developed, leaving remaining areas that are often far from job centers, prone to wildfire,environmentally sensitive, or important for agriculture.
While existing state down payment assistance programs are not immune to these concerns because they can also be used to purchase new homes, Prop. 37 goes further by limiting assistance exclusively to newly constructed homes. As a result, Prop. 37 could further direct “middle-class” housing demand toward suburban and exurban areas. This is a critical deviation from infill development — building on denser, already developed land — which has been the focus of state affordable housing and environmental efforts.
This pattern of building housing on the periphery of cities is known as urban sprawl and carries various environmental and equity considerations. Development in more suburban and inland areas can push Californians further from job centers, increasing their commute times and making it difficult to travel without a car. It may also encourage development in areas on the outskirts of cities that may cause new homes to infringe upon natural habitats and important agricultural lands, especially in areas like the Central Valley. Sprawl can also lead to divestment from urban areas, which are often composed of communities of color, and concentrate investment in higher-income, suburban neighborhoods, further exacerbating racial and income inequality across the state.
What Other Homeownership Costs Could Come with Prop. 37’s New-Construction Requirement?
Prop. 37’s new construction requirement could steer homebuyers toward housing with higher out-of-pocket costs on top of their monthly mortgage payments. Unlike existing state down payment assistance programs, which can be used to purchase both new and existing homes, Prop. 37 would limit assistance to newly constructed homes. New construction homes are more likely to come with homeowners association (HOA) dues, Mello-Roos assessments, and home insurance challenges.
HOA fees are far more common in new homes as nearly 70% of newly built homes listed for sale nationally in 2024 were subject to HOA dues, compared with about 38% of existing homes. In California, more than a third of residents live in an HOA — including about 65% of all California homeowners. The average monthly fee is $280, and fees can rise up to 20% annually without a homeowner vote under current state law.
New construction in undeveloped areas of California also often comes with Mello-Roos special tax assessments, which fund infrastructure like roads, schools, and utilities in newly developed areas and are layered on top of regular property taxes — typically adding another monthly fee to new-build homes for years.
California’s home insurance market also compounds the problem. Some state insurers have stopped providing coverage in many of the wildfire-prone areas where new homes are being built which has statewide ramifications. California’s state-run insurer of last resort, known as the FAIR Plan, is likely to be overburdened to the extent that more insurers drop coverage across the state.
While home insurance challenges are not unique to Prop. 37, they remain acute in the wildland-urban interface — where almost 45% of the houses built in California have been located over the last 30 years. Though these areas tend to have less expensive real estate, they are also particularly susceptible to wildfires. That exposure could mean higher premiums, more difficulty securing a loan, or dependence on the FAIR Plan, driving additional costs on top of the repayments of Prop. 37.
Altogether, these compounding factors could undercut the affordability gains the measure is purported to provide for Californians. As a result, the benefits of Prop. 37 may skew toward eligible families with greater financial resources who were already better positioned to cover the costs of homeownership.
Various carpentry-focused unions and realty organizations — like the California Association of Realtors and the Northern California Carpenters Regional Council — have also expressed support for the measure. Gubernatorial candidate Xavier Becerra has also expressed support for this measure.
The California Budget & Policy Center is a nonpartisan research and analysis nonprofit and does not endorse or oppose ballot measures. This analysis reflects the institutional position of the Budget Center, developed and reviewed by our policy leadership team.
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key takeaway
Proposition 1, appearing on the November 2026 ballot, would provide funding for affordable housing and accessible homeownership. Prop. 1 asks voters to authorize a $11.25 billion general obligation bond to fund programs that support the creation and preservation of affordable housing, expand homebuying opportunities for low- and moderate-income Californians and veterans, and invest in permanent solutions to solve homelessness. If Prop. 1 is approved, it would replenish funding for several successful state programs that have exhausted their resources. Prop. 1 was placed on the ballot by the Legislature through passage of Senate Bill 417 (2026).
How Has California Expanded Affordable Housing & What Gaps Remain?
Over the past six years, California has nearly tripled the number of new affordable homes it funds. Yet the state continues to face a severe shortage of affordable housing, particularly for Californians with the lowest incomes. California needs more than 2.5 million new homes, including at least 1 million homes that are affordable to lower-income households. Housing cost pressures fall hardest on California renters as nearly half pay unaffordable rents — a hardship that disproportionately impacts Black and Latinx renters with low incomes, older adults, mixed-status families, and people with disabilities.
Unlike market-rate or luxury housing, affordable housing projects typically cannot be built without subsidies because affordable rents do not generate enough revenue to cover development or operating costs. As a result, affordable housing projects rely on multiple funding streams to close financing gaps. Currently, more than 46,000 affordable homes across California (491 developments) are waiting for the last bit of state funding needed to break ground. Prop. 1 would provide funding for various programs that help bridge the financial gap to keep affordable housing construction moving.
Why Is Affordable Housing Funding Running Out & How Would Prop. 1 Help?
Despite the ongoing housing affordability challenges Californians are facing, state funding for affordable housing has largely disappeared. Over the past several years, affordable housing programs have relied on one-time General Fund investments to supplement voter-approved housing bonds, but those investments have drastically declined. The 2026 Budget Act only includes one-time investments in two significant affordable housing programs: $500 million for state Low Income Housing Tax Credits and $200 million for the Multifamily Housing Program, effectively leaving multiple programs without additional funds. Beyond these investments, there is no meaningful ongoing or one-time investment from the state General Fund for affordable housing development.
The state’s remaining modest affordable housing funding sources, including the Affordable Housing and Sustainable Communities Program (AHSC), funded through Cap-and-Invest; state and federal Low-Income Housing Tax Credits; and SB 2 planning funds are insufficient to meet the demand and often require additional funding to be fully leveraged. The AHSC program was expected to receive nearly $800 million per year for affordable housing, but recent changes by the California Air Resources Board put that funding at risk.
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The funding approved by voters through the 2018 Veterans and Affordable Housing Bond Act has been fully committed — exhausted within five years, by the end of 2023, due to overwhelming demand. The state’s flagship Multifamily Housing Program, which relied on funding from the bond and one-time General Fund investments, is routinely oversubscribed by roughly 9 to 1. Together these signal that the barrier to building more affordable housing in California isn’t a lack of will or projects — it’s a lack of sustainable funding.
Without new state investments, affordable housing production will stall just as California is making meaningful progress and as federal cuts threaten to make it even more difficult for Californians to make ends meet, which is why state lawmakers placed Prop. 1 on the ballot.
What Affordable Housing and Homeownership Programs Would Prop. 1 Fund?
Prop. 1 asks voters to authorize $11.25 billion in general obligation (GO) bonds that would support the construction and preservation of affordable rental homes, expand homeownership assistance for low- and moderate-income homebuyers, including veterans, and provide permanent housing for people at risk of or experiencing homelessness. Within these categories, it would provide some funding for programs that serve distinct populations, such as California tribes, farmworkers, unhoused youth, and college students. The bond funds would be allocated as follows:
Affordable Housing Development and Preservation
$5.1 billion for the Multifamily Housing Program (MHP), which supports the construction, rehabilitation, or preservation of affordable rental housing. At least 10% of units in a MHP development must be available for extremely low-income households who are at the highest risk of facing homelessness. This is one of California’s model affordable housing development programs.
$1.15 billion for supportive housing through the MHP program. Supportive housing provides stable homes with wrap-around services for people who were chronically homeless or at risk of becoming so. These funds can be used for operating subsidy reserves, which are critical to the longevity and sustainability of permanent supportive housing.
Up to 15% — $150 million — would be allocated as grants to acquire or build permanent supportive housing among other specified uses.
Another $150 million is carved out for the capital development or acquisition of youth housing through MHP. This would serve current or former foster youth, homeless minors or youth, or youth at risk of homelessness.
$750 million for the Portfolio Reinvestment Program, which provides funding to rehabilitate and extend the long-term affordability of state-funded rental multifamily housing projects that are at risk of conversion to market-rate housing.
$500 million for the Infill Infrastructure Grant Program. This would provide incentive grants to assist with new construction and rehabilitation of infrastructure that supports high-density affordable and mixed-income housing in locations designated as infill.
$450 million for the Joe Serna, Jr. Farmworker Housing Program to fund grants or loans for the construction or rehabilitation of housing for agricultural employees and their families.
$350 million for affordable student housing projects to be split evenly between the University of California and the California State University.
$200 million for a new Community Anti-Displacement and Preservation Program, which helps protect unsubsidized housing that may naturally be affordable and requires long-term affordability regulations.
$200 million for the Tribal Housing Grant Program which finances housing and housing-related activities to enable tribes to rebuild and reconstitute their communities.
$200 million to the Affordable Housing Innovation Fund for the Local Housing Trust Fund Matching Grant Program. This would fund competitive grants or loans to local housing trust funds that develop, own, lend, or invest in affordable housing and would be used to create pilot programs to demonstrate innovative approaches to creating or preserving affordable housing.
Homeownership
$1.25 billion for the CalVet Home Loan Programto help veterans and their families purchase homes. This portion of the bond would be repaid through mortgage (principal and interest) payments.
$600 million for the CalHome program. CalHome provides forgivable loans for lower-income households in self-help homeownership projects, including subdivisions and manufactured homes.
$500 million for the My Home downpayment assistance program to fund low-to-moderate income home purchase assistance programs.
What Benefits Would Prop. 1 Create for California’s Economy & Communities?
Prop. 1 would help expand and preserve California’s affordable housing supply while generating economic benefits and advancing the state’s housing goals. The bond would help close the financing gap for affordable rental homes, which serve lower-income California families and include seniors, people with disabilities, farmworkers, college students, and unhoused youth. According to legislative analyses, the bond is expected to:
Produce more than 40,000 new affordable homes for lower-income families and individuals.
Preserve more than 5,500 existing affordable homes, ensuring they remain affordable for future generations.
Create more than 53,000 construction jobs through building new housing across the state.
Generate $1.3 billion in state and local tax revenue that supports local communities and public services.
Together, these investments would expand housing opportunities, reduce housing instability, strengthen local economies, and help California meet its long-term housing needs.
How Would Prop. 1 Be Repaid?
Prop. 1 asks voters to authorize a total of $11.25 billion in GO bonds, divided as follows:
A $10 billion GO bond for affordable housing and homeownership programs that would be repaid from the state’s General Fund, and
A $1.25 billion veterans’ bond, a type of tax-exempt GO bond, for the CalVet Home Loan program that would be repaid through mortgage payments, with the General Fund as a backstop.
California voters often pass GO bonds to fund infrastructure projects that are designed to serve the public over many generations, as has been the case with affordable housing. Voters have also historically passed veterans’ bonds for CalVet to support homeownership opportunities for veterans.
GO bonds are repaid from the state’s General Fund. Repaying the $10 billion bond would cost $580 million per year for the next 30 years, for a total estimated cost of $17.4 billion ($10 billion in principal and $7.39 billion in interest). As of the governor’s proposed 2026-27 budget, California had $6.3 billion in General Fund debt service for GO bonds, or roughly 2.6% of General Fund expenditures.
In contrast, veterans bonds are generally self-supporting because they are repaid through principal and interest payments made by CalVet Home Loan Program borrowers. However, they are still GO bonds and are ultimately backed by the state’s General Fund. If program revenues were insufficient to cover the debt service, the General Fund would be responsible for the difference. It is unclear how often, if ever, the General Fund has had to backfill debt payments for previous veterans bonds.
Prop. 1 bond dollars would replenish depleted affordable housing programs. But bond dollars alone will not solve the housing shortage, nor would they replace the need for ongoing investments to meet the state’s substantial housing needs.
Prop. 1 and Prop. 38 Draw From Same Bonding Capacity, Face Important Trade Offs
Voters face two GO bond measures on the November 2026 ballot: Prop. 1 and Proposition 38. Prop. 38 would authorize $8.4 billion in GO bonds to support research and development in immunology and immunotherapy. Voters should weigh how each proposal addresses the state’s most pressing needs, fits within California’s limited borrowing capacity, and affects the state’s ability to invest in services that help families today and in the future.
Like all GO bonds, Prop. 38 would require long-term General Fund debt-service payments — estimated at $500 million annually for 25 years — reducing budget and bonding capacity for other state priorities. If both Prop. 1 and Prop. 38 are approved, it would reduce General Fund dollars by roughly $1.1 billion annually.
Public sector investment in scientific research is needed, particularly given federal cuts, but Prop. 38 raises important fiscal and policy considerations. GO bonds are conventionally used to finance infrastructure projects — like roads, bridges, or housing — that can be used over decades, roughly matching the time it takes to repay the bond itself.
Funding research through GO bonds does not work the same way. Bond-funded research gets most of the dollars upfront for grants, salaries, and operating costs, but are not guaranteed to be built into a lasting asset. Research findings do compound overtime, but the bond dollars themselves are depleted after a few years. The state then spends years or decades paying interest on bonds that stopped directly funding work long ago. So while scientific research needs funding, a GO bond is not the appropriate funding mechanism. Plus, half of Prop. 38’s funding would be concentrated on a limited set of health conditions, even though California already has multiple public and private research institutions conducting work in these areas.
Prop. 1 doesn’t confront these same challenges. While previous affordable housing bond dollars were also used up quickly, they left behind affordable homes that will continue to serve numerous families for decades. Affordable housing developments that use state dollars must have affordability requirements for at least 55 years — way beyond the repayment of the bonds with which they’re financed. The community benefits and capital assets outlast the debt, which is the intended purpose of GO bonds.
Prop. 1 Supporters and Opponents
Prop. 1 is supported by a broad coalition of organizations representing housing, business, labor, local government, older adults, tenants, homelessness, urban planning, construction, environmental, and civil rights interests, among others.
Official opposition has been limited. The primary opponents on record include a few Republican state legislators who voted against placing the measure on the ballot.
The California Budget & Policy Center is a nonpartisan research and analysis nonprofit and does not endorse or oppose ballot measures. This analysis reflects the institutional position of the Budget Center, developed and reviewed by our policy leadership team.
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key takeaway
Proposition 3 will appear on the November 2026 statewide ballot, asking California voters whether to make permanent the higher-income tax rates on the state’s highest earners. These top tax rates were first enacted by voters in 2012 and renewed in 2016 to help fund schools, health care, and other supports for working families. Without action, the current rates are set to expire after 2030, reducing state revenues by billions of dollars annually and threatening funding for schools and state programs and services that support Californians every day.
Prop. 3 would make permanent the rates put in place since 2012, preserving a key element of progressivity (requiring households with higher incomes to pay higher tax rates) in the state’s revenue structure that funds critical investments that improve the quality of life for all Californians. The measure would not raise taxes or change existing income tax rates; it simply removes the expiration date on current tax rates for the state’s highest earners. Revenues would continue to support the entire state General Fund budget by helping meet the TK-14 constitutional funding guarantee and freeing up revenue for other programs and services, just as they have since 2012.
Background on Prop. 30 and Prop. 55
In 2012, after the state faced significant revenue losses as a result of the Great Recession, California voters approved Proposition 30, which added new income tax brackets for the state’s highest earners (10.3%, 11.3%, and 12.3%, depending on household income) and included a temporary sales tax increase. Both the income tax rates and the sales tax increase were temporary, with the sales tax set to expire in 2016 and the income tax rates in 2018. Proposition 30 also created the Education Protection Account, a state account in the General Fund that receives and disburses revenues from the top income tax rates.
what is the education protection account (epa)?
Proposition 30 (2012) established the Education Protection Account, a state account where revenues from the top income tax rates are deposited. Of the funds in the account, 89% are distributed to schools and 11% to community colleges. This revenue is treated as General Fund revenue, subject to constitutional requirements including Prop. 98 (1988), the state’s minimum funding guarantee for TK-14 education, and Prop. 2 (2014), which established rules for building state budget reserves and paying down state debts. The revenue deposited into the EPA increases the Prop. 98 guarantee and is used to help meet the guarantee, freeing up General Fund revenue for other state budget priorities.
In 2016, voters approved Proposition 55, which extended the income tax rates for another 12 years (to 2030), while allowing the sales tax to expire as scheduled. Prop. 55 also added a constitutional formula intended to increase funding for the Medi-Cal program when revenues exceed a certain threshold. This specific formula has never directed funds to Medi-Cal, and the current measure would allow it to expire. However, top tax rate revenues do support the Medi-Cal budget indirectly through the General Fund capacity generated by Prop. 55.
Since their initial enactment in 2012, these higher tax rates have generated around $120 billion for schools and other essential services. In recent years, the higher rates have generated around $10 billion annually. These revenues now form a core component of the state budget, supporting the TK-14 education budget, strengthening General Fund capacity to support other vital programs and services, and building reserves.
Who Pays the Voter-Approved Top Tax Rates?
The voter-approved top tax rates only impact the highest-income Californians.
These rates only apply to the top 2% of California tax filers. In tax year 2025, these top rates only applied to people with incomes above around $371,000 for single tax filers and about $743,000 for married couples filing jointly. These thresholds increase annually with inflation.
Without Voter-Approved Tax Rates, the Top 1% Would Receive Another Tax Cut
The top-earning 1% of Californians would receive a major tax cut if Prop. 55 rates are not extended. If the voter-approved top tax rates are allowed to expire, the vast majority of tax filers in the top 1% by income would receive an average annual tax cut of nearly $59,000, according to estimates from the Institute on Taxation and Economic Policy. This top 1% group would get about 98% of the total tax cuts. The remaining tax cuts would go to some households in the next 4% of highest-income filers.1Not all households in the top 5% or top 1% would receive tax cuts from the expiration of the top tax rates for several reasons. First, filers are subject to the top tax rates if their taxable income — that is, income after accounting for allowed exemptions and deductions — exceeds the thresholds established by Prop. 30 and Prop. 50. In contrast, the thresholds for the top 5% and top 1% used by the Institute on Taxation and Economic Policy for this analysis are based on total income before exemptions and deductions. So tax filers in the top 1% by total income may have taxable incomes under the threshold for the top rates. Second, some high-income filers that use specific tax preferences may be subject to an “alternative minimum tax,” which could be triggered if their regular tax bill were reduced. And finally, because thresholds for these rates vary by household type, a married couple filing a joint tax return with a total income of $500,000 falls into the top 5% of all tax filers, but their total income — even before accounting for exemptions and deductions — is below the threshold for the Prop. 55 taxes of around $743,000, for example. Around 15% of this group would receive a tax cut, averaging more than $2,000 annually. Californians in all other income groups would see no change to their taxes.
California’s tax system would be more regressive if the Prop. 55 tax rates expire. A regressive tax system is one in which lower-income households pay larger shares of their income in taxes than higher-income households. In contrast, in a progressive tax system, higher-income people pay higher shares of their income in taxes. California’s tax system is more progressive than many other state tax systems, in large part due to these voter-approved top tax rates that are up for renewal under Prop. 3.
When you add up the various state and local taxes that Californians pay — including the sales tax, property tax, and other types of taxes — the highest-income 1% currently pay about 12% of their income in taxes on average. That’s barely more than the 11.7% paid by Californians in the lowest 20% by income. If the top rates were not in effect, the top 1% would pay only about 10.7% of their income in state and local taxes — lower than what the bottom fifth of Californians pay.
Top Earners’ Incomes Have Soared
The number of Californians with incomes high enough to be subject to the voter-approved top tax rates has more than doubled, reflecting soaring incomes among top earners. Around 185,000 tax filers, including more than 175,000 California resident filers, had incomes above the thresholds for Prop. 30’s top tax rates in 2013, the first year the rates were in effect. By 2024 (the latest available data), the number had reached nearly 376,000, including around 355,000 California residents.2“Tax filer” represents a tax filing unit — the primary filer as well as any spouses and dependents included on the tax return. A tax filing unit can be an individual, a couple, or a family, and in some cases can include unrelated dependents. This increase is due to the incomes of these high-income households growing much faster than inflation over this period.
Californians subject to the top tax rates have seen their incomes grow dramatically over the past several decades, while most Californians have lost ground or experienced income declinesafter adjusting for inflation. The top 1% of Californians saw their inflation-adjustedincomes increase more than 2.5 times (157%) between 1987 and 2024, while those in the bottom 80% saw decreases in real income over that time.
To be in the top 1%, a tax filer had an income of at least $973,097 in 2024. On average, this group reported more than $3 million per tax return in 2024 — about 54 times the income of the middle fifth of Californians, who earned around $56,000 on average. In even starker contrast, the top 0.1% had an average income of over $15 million — 268 times that of the middle fifth of Californians. In other words, someone in the top 1% can earn in just under one week what the average middle-income Californian earns in an entire year, and someone in the top 0.1% can earn that amount in just over a day.
What Have the Top Income Tax Rates Accomplished?
Since the passage of Prop. 30 in 2012, the top tax rates have generated about $120 billion in state revenue.3This figure reflects revenues from the top tax rates allocated to TK-14 education from the Education Protection Account (EPA) through the 2024-25 fiscal year. On average, this revenue has represented about 5.5% of total General Fund revenues. The funds raised by the top tax rates approved by voters through Prop. 30 and Prop. 55 have been a major revenue source for the state, supporting critical services including education, health care, and economic security programs. This revenue has also helped the state to build up budget reserves to be better prepared for downturns when revenues decline or come in lower than expected.
The annual revenue raised by the top tax rates has increased in line with overall state revenues. These revenues are sensitive to stock market fluctuations, as a large share of the income of high-income households comes from earnings on investments such as dividends and capital gains. For example, Prop. 55 revenues peaked at more than $16 billion when the stock market surged in 2021 and then subsequently fell in line with the stock market decline in the following years, before growing to nearly $12 billion in 2024. The sensitivity of these revenues to economic conditions makes it all the more important that state leaders have the capacity to save revenues during high-revenue years in the state’s budget reserves for future downturns, as required under Prop. 2 of 2014 — which may be modified to require additional savings in some strong-revenue years if voters approve changes to the existing measure with Prop. 2 on the November 2026 ballot.
Top tax rate revenues provide critical support for schools and community colleges. Top tax rate revenues serve two purposes for the TK-14 education budget: 1) increase the Prop. 98 minimum guarantee’s annual calculation and 2) provide the revenues needed to meet the guarantee. Because top tax rate revenues count as General Fund revenues, they directly affect how the annual Prop. 98 level is calculated. In years when the General Fund experiences strong growth, the guarantee is set as a share (about 40%) of General Fund revenues, establishing a higher floor.4The minimum guarantee is determined using one of three formulas: 1) approximately 40% of General Fund revenue, 2) the prior year level adjusted for K-12 attendance growth and growth in per capita personal income, or 3) the prior year level adjusted for K-12 attendance growth and per capita General Fund revenue growth. In other years, the guarantee builds on the prior year’s level, carrying forward the growth built when revenues were strong. Regardless of how the guarantee is calculated, the effect of the top tax rate revenue is cumulative. As shown in the chart below, the guarantee has grown on an ongoing basis since 2012-13, with part of this growth attributable to the top tax rates.
what is proposition 98?
Prop. 98 is a constitutional amendment adopted by California voters in 1988 that establishes an annual minimum funding level for TK-14 education 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 reduction or elimination.
In addition to raising the guarantee’s calculation, Prop. 55 revenues directly help meet the guarantee. Revenues from the top tax rates are used to meet the Prop. 98 obligation, which frees up General Fund dollars that would otherwise be needed to meet the guarantee. These freed-up dollars are used to support non-TK-14 programs, build state reserves, and pay down debts. Since 2012-13, when these revenues began to flow to schools and community colleges, Prop. 55 revenues have provided about $120 billion to help meet the TK-14 budget.5While the top tax rate revenues have provided approximately $120 billion to the TK-14 budget through the EPA, because these revenues also reduce the General Fund dollars to meet the guarantee, the overall education funding impact is approximately 40% of total revenues.
The chart below shows the growth in the minimum guarantee, and the share provided by the top tax rate revenues, adjusted to 2024 dollars. Throughout this period, top tax rate revenues have enabled the state to implement key educational programs. For example, in the 2013-14 school year, policymakers began implementing a major school finance reform to more equitably allocate dollars to school districts based on student need.
Top tax rate revenues have also created more General Fund capacity to support critical economic security, housing, and health programs.
By helping meet the TK-14 constitutional funding guarantee, these revenues reduce General Fund dollars needed for that obligation, freeing up resources for other budget priorities, including:
California’s Earned Income Tax Credit, which boosts incomes for workers who earn little from their jobs, was initially established in 2015, and was expanded to more Californians in 2017 and 2018.
In 2021, policymakers launched a multi-year plan to fund an increase of 200,000 child care slots, reaching about 152,000 in 2026-27, making progress in expanding access to children and families with low incomes.
In 2019, the state created the Homeless Housing, Assistance and Prevention (HHAP) program, which provides funding to localities to finance solutions tailored to their needs and has shown positive outcomes, including reducing youth homelessness.
Policymakers restored several Medi-Cal benefits between 2014 and 2019 that had been cut due to budget shortfalls during the Great Recession, including adult dental benefits, podiatry, optometry, audiology, and speech therapy services.
Prop. 30 and Prop. 55 have increased the state’s capacity to save for a rainy day and pay down debts.
The revenues from the top tax rates have helped put the state in a better position to weather difficult economic times by increasing deposits into state budget reserves and helping to pay down budgetary debt.6Prop. 2 (2026), if approved, would make additional changes to require state leaders to increase deposits into the rainy day fund in some high-revenue years. Voters approved Prop. 2 in 2014, which requires the state to set aside a certain share of General Fund revenues each year in order to build the state’s rainy day fund (the Budget Stabilization Account) and pay down state budgetary debts. Under these rules, the state must set aside 1.5% of General Fund revenues each year, half of which is deposited into the rainy day fund while the other half must be used to pay down state debts.7Starting in 2030-31, the entire amount will be deposited into the rainy day fund, although policymakers will retain the option to use up to one-half to pay down debts. Additionally, the state is required to set aside additional revenues in years when revenues from taxes on capital gains exceed 8% of total General Fund tax revenues.
Since Prop. 2, California has been able to build up substantial reserves, aided by the revenues generated by Prop. 30 and Prop. 55. The balance is projected to be more than $15 billion for fiscal year 2026-27 under the enacted budget. In addition to the required 1.5% set-aside of revenues, Prop. 30 and Prop. 55 have likely resulted in larger capital gains-related set-asides, as high-income people subject to the top tax rates receive more of their income in the form of capital gains (proceeds from selling assets such as stock holdings).
Prop. 2 also created a new budget reserve to support schools and community colleges, the Public School System Stabilization Account (PSSSA). Deposits into this reserve are required only if certain budget conditions are met, typically when revenue growth is strong — particularly revenue from capital gains. Thus, the top tax rates help to boost deposits into this reserve to support TK-14 education when revenues fall short.
In recent years, the PSSSA has provided one-time resources to sustain education programs. For example, in the 2023-24 fiscal year, the state was not able to meet the minimum guarantee and the full balance ($8.4 billion) was withdrawn to help sustain existing programs. At the end of 2026-27, the mandatory deposits in this account are projected to total $8.7 billion, with a full balance of $9.4 billion.
Why Renewing the Top Tax Rates Matters for California
As the revenues from the current top tax rates have become a critical source of funding for education, health care, and other state services, their expiration after 2030 would likely lead to significant budget shortfalls. If Prop. 3 does not pass — and state leaders or voters do not approve alternative revenues — funding for essential state services would be put in jeopardy. This is especially concerning given that state officials already project ongoing budget deficits in upcoming years, as the cost of existing state services is growing due to inflation and a changing population, and revenue growth is not keeping up. Those projected deficits, compounded by federal cuts resulting from H.R. 1, the 2025 federal budget reconciliation law known as the “One Big Beautiful Bill Act,” would put significant pressure on the state budget and the programs it supports.
In recent years, the top tax rates have contributed around $10 billion annually to the state budget, and the Legislative Analyst’s Office projects that making these rates permanent would bring in between $5 billion and $15 billion annually in the future — depending on the economy and stock market performance. The loss of $5 billion to $15 billion could mean:
Reduced General Fund resources to protect and strengthen services that keep Californians healthy, housed, and economically secure. In recent years, more than two-thirds of state spending growth from available revenues has gone simply to sustaining existing levels of services, including keeping pace with rising costs and growing caseloads in programs like Medi-Cal, In-Home Supportive Services, and child care. The loss of Prop. 55 revenues would worsen existing deficit projections, making it harder for the state to maintain even current levels of services, potentially leading to programmatic cuts to essential programs.
The loss of a key revenue stream and increased pressure to meet the Prop. 98 minimum guarantee. In the near term, without Prop. 55 revenues, the state would need to replace billions in funding from other General Fund sources to meet the guarantee, crowding out other budget priorities. This is because Prop. 98 would not automatically be reduced to account for the immediate and substantial General Fund revenue decline. Over time, lower General Fund growth absent top tax rate revenues could result in the guarantee growing more slowly than it otherwise would. Overall, the loss of a dedicated revenue stream and a potentially slower-growing guarantee could result in approximately $2 billion to $6 billion less annually for the TK-14 budget than would otherwise be available.
A reduced capacity to save and prepare for economic downturns. Without the additional revenues from the current top tax rates, deposits into the state’s rainy day fund and debt repayments required by Prop. 2 would be lower. This would leave the state less resilient when the next recession arrives, making critical state services more vulnerable to cuts.
Diminished ability to respond to anticipated federal cuts. The 2025 budget reconciliation package, H.R.1, includes significant cuts to health care and food assistance. Cuts to health care could total tens of billions each year. On top of that, cuts to food assistance could cost the state more than $5 billion annually. Currently, the state budget does not have the General Fund capacity to fully address these cuts, and the loss of top tax rates would only increase the millions of Californians at risk of losing these critical services.
The California Budget & Policy Center is a nonpartisan research and analysis nonprofit and does not endorse or oppose ballot measures. This analysis reflects the institutional position of the Budget Center, developed and reviewed by our policy leadership team.
Kayla Kitson and Erik Saucedo contributed to this publication.
Not all households in the top 5% or top 1% would receive tax cuts from the expiration of the top tax rates for several reasons. First, filers are subject to the top tax rates if their taxable income — that is, income after accounting for allowed exemptions and deductions — exceeds the thresholds established by Prop. 30 and Prop. 50. In contrast, the thresholds for the top 5% and top 1% used by the Institute on Taxation and Economic Policy for this analysis are based on total income before exemptions and deductions. So tax filers in the top 1% by total income may have taxable incomes under the threshold for the top rates. Second, some high-income filers that use specific tax preferences may be subject to an “alternative minimum tax,” which could be triggered if their regular tax bill were reduced. And finally, because thresholds for these rates vary by household type, a married couple filing a joint tax return with a total income of $500,000 falls into the top 5% of all tax filers, but their total income — even before accounting for exemptions and deductions — is below the threshold for the Prop. 55 taxes of around $743,000, for example.
2
“Tax filer” represents a tax filing unit — the primary filer as well as any spouses and dependents included on the tax return. A tax filing unit can be an individual, a couple, or a family, and in some cases can include unrelated dependents.
3
This figure reflects revenues from the top tax rates allocated to TK-14 education from the Education Protection Account (EPA) through the 2024-25 fiscal year.
4
The minimum guarantee is determined using one of three formulas: 1) approximately 40% of General Fund revenue, 2) the prior year level adjusted for K-12 attendance growth and growth in per capita personal income, or 3) the prior year level adjusted for K-12 attendance growth and per capita General Fund revenue growth.
5
While the top tax rate revenues have provided approximately $120 billion to the TK-14 budget through the EPA, because these revenues also reduce the General Fund dollars to meet the guarantee, the overall education funding impact is approximately 40% of total revenues.
6
Prop. 2 (2026), if approved, would make additional changes to require state leaders to increase deposits into the rainy day fund in some high-revenue years.
7
Starting in 2030-31, the entire amount will be deposited into the rainy day fund, although policymakers will retain the option to use up to one-half to pay down debts.
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Governor Gavin Newsom released the revised 2026-27 California state budget on May 14, projecting positive year-end balances for 2026-27 and 2027-28 and increasing state reserves. In contrast to the governor’s January proposal, which projected a small deficit for 2026-27, the May Revision reflects a stronger fiscal position for the state due to revenue projections that exceed the earlier forecast by $16.8 billion over the three-year budget window.
Stronger-than-expected revenues do not solve all of the state’s challenges. The 2026-27 state budget is Governor Newsom’s last opportunity to fully respond to the damaging federal cuts enacted through H.R. 1. The state is losing billions of dollars in federal funding and struggling with substantial new costs, and Californians are facing new restrictions on access to health care, food assistance, and more.
Despite improving revenues, the $246.6 billion General Fund spending plan is $1.8 billion lower than what the governor proposed in January and reflects concerns about economic uncertainties, geopolitical conflicts and impacts on energy prices, and other external factors that could change the overall fiscal outlook of the state. In addition, the administration and the Legislative Analyst’s Office (LAO) project that rising costs of maintaining state programs and services will outpace revenues in future years, resulting in structural deficits without other state actions. As a result, the May Revision proposes a mix of revenue, spending, and reserve solutions to balance the budgets for 2026-27 and 2027-28.
Revenue
The governor’s proposed revenue solutions include permanently capping business tax breaks at $5 million or 50% of total tax liability (whichever is higher) and adding a new digital software tax.
Reducing inequitable tax breaks that disproportionately benefit the largest and most profitable corporations and adding the new digital software tax are common-sense revenue solutions that modernize our state’s tax system, respond to external changes, and ensure the state can continue to make investments in Californians.
Spending
While the governor’s revenue solutions are a positive initial step, the May Revision mostly fails to address the harmful impacts of H.R. 1, which include well over 1 million Californians losing health coverage through Medi-Cal and more than 3 million households at risk of losing all or some of their nutrition assistance through CalFresh. Similar to this year’s budget (2025-26), the governor’s proposal would compound rather than mitigate that harm by making additional state-level cuts to Medi-Cal, targeting certain immigrants, increasing monthly premiums, and adding onerous paperwork and work requirements that make it more difficult for Californians with low incomes to access benefits for which they are eligible.
The lack of a robust state response to H.R. 1 adds to the ongoing affordability crisis confronting millions of Californians. While the May Revision purports to maintain many prior year expansions, it also allows an array of investments in housing affordability and homelessness to sunset, with no additional funding in 2026-27, and further delays expansion of needed child care spaces and rate reform for undercompensated child care providers.
The governor’s revised budget protects and maintains some of the progress made in prior budget years, including policy advances in behavioral health, cash assistance, food assistance, universal school meals, and expansion of before and after school programs.
Notably, one part of the revised proposal that would see significant new investments is education. The improving near-term state revenue outlook results in higher estimates for the Proposition 98 minimum funding guarantee for transitional kindergarten (TK), school-based state preschool, K-12 schools, and community colleges compared to the governor’s January proposal and the current year budget. In addition, the governor proposes nearly $10 billion in new or expanded investments in TK-12 and community colleges, on top of maintaining existing programs and services.
Reserves and Other Issues
The governor’s revised budget projects nearly $30 billion in reserves at the end of 2026-27. In addition, the revised budget proposes depositing nearly $10 billion into the Projected Surplus Temporary Holding Account in 2026-27, then allocating these funds in 2027-28 — assuming they materialize.
The administration projects that the state prison population will moderately increase in the near term due to the passage of Prop. 36 in November 2024, which increased penalties for certain drug and theft offenses, including by reversing some of Prop. 47’s (2014) sentencing reforms. However, the administration projects that the prison population will resume its long-term decline due to other justice system reforms that remain in effect. Yet, the May Revision does not include any additional closures of state prisons, as recommended by the LAO.
Outlook
In terms of future budget years, California’s projected structural budget imbalance reflects a revenue problem rooted in a decades-old tax and governance structure. The May Revision shines a light on how investing in the needs of Californians and protecting them from federal attacks will fall short without revenue solutions.
The governor’s proposed cap on business tax credits is a positive step toward addressing the state’s long-term revenue imbalance and reducing inequitable tax breaks that disproportionately benefit large, profitable corporations. The need for a cap underscores the inequities in the state’s ‘shadow budget’ that foregoes billions of state revenues that could otherwise be invested in the health and well-being of Californians.
In the near term, the governor and Legislature should also close the Water’s Edge tax break, which allows large multinational corporations to shift state profits to offshore tax havens, which could raise up to around $3 billion annually. As state leaders confront the challenges of federal cuts and economic uncertainty, they have a responsibility to make the state’s tax system more fair in order to invest in and protect the state’s communities.
This First Look report outlines key elements of the May Revision budget proposal and explores how the governor prioritizes spending, revenue, and reserve proposals amid ongoing federal cuts and affordability challenges. The report also highlights alternative proposals included in the Senate budget plan released in April.
What is the May Revision?
The May Revision, also known as the May Revise, is an update to the governor’s proposed state budget, released by May 14 each year. It includes new estimates of the state’s revenues, updates proposed spending based on the latest information, and may change, add to, or remove policy proposals from the January budget proposal.
The administration’s economic outlook is an important aspect of the budget because aggregate changes in economic indicators, such as jobs and wages, affect how much revenue the state will generate. The revised budget projects weaker economic growth in the near term for both California and the US due to new developments, such as higher global energy prices due to the Iran war, which are expected to lead to higher inflation and reduced purchasing power, weakening consumer demand and overall economic activity. The ongoing impact of tariffs, which are projected to continue to raise costs for businesses and consumers in the near term, is another key factor behind the administration’s weaker economic outlook. On top of this, the revised budget projects that California’s job market will remain weak, with essentially no aggregate job growth expected in 2026 or 2027.
Californians Begin to See Harm from Budget Cuts as Corporations Enjoy Massive New Tax Breaks
The administration’s outlook is useful for understanding how economic conditions might impact budget revenues, but it’s also important to consider how economic conditions and recent policy choices are affecting everyday Californians who count on services funded by the budget.
Communities across the state have been facing mounting affordability pressures for years due to persistently high inflation and insufficient investments in affordable housing, child care, and other essentials. Roughly 1 in 6 Californians struggle to afford food, housing, and other basic needs, based on the California Poverty Measure. Economic instability is especially common among young adults ages 18 to 24, with nearly 1 in 4 experiencing poverty, as well as older adults age 65+, with nearly 1 in 5 in poverty.
Now the economic challenges facing Californians are worsening as deep federal budget cuts to health care and food assistance, together with recent state cuts to health care, begin to take effect, targeting people with low incomes, immigrants, communities of color, and other marginalized communities. This includes:
The elimination of CalFresh food assistance for Californians with humanitarian immigration statuses that began April 1, 2026 and the expansion of harsh time limits to more groups of Californians beginning June 1, 2026. These cuts will take food away from children, seniors, and people with disabilities and could lead to increased poverty and food insecurity across every legislative district.
The elimination of full scope Medi-Cal and CHIP coverage for immigrants with humanitarian status starting October 1, 2026, with several additional cuts that will reduce access to health care starting January 1, 2027. This follows on the heels of state cuts taking effect this year that will reduce access to Medi-Cal, including an enrollment freeze applying to undocumented adults that began January 1. State and federal cuts to health care threaten to leave millions of people without coverage and harm Californians in every legislative district.
As Californians begin to feel the harm of deep federal budget cuts, large corporations are beginning to enjoy the benefits of $1 trillion in federal tax breaks over the next 10 years that are partly funded through those cuts. At least 88 of the largest corporations in the US paid no federal corporate income tax in their most recent fiscal year, including several headquartered in California, even though they had significant pretax profits, reflecting at least in part the federal corporate tax breaks enacted last year, combined with those enacted during president Trump’s first term. The richest 1% of US residents are also slated to receive $1 trillion in federal tax cuts over the next 10 years, while low- and middle-income families will pay higher taxes, at a time when affordability challenges continue to increase and income inequality in the US and California are already extreme.
These federal policy choices will widen already extreme inequities in California, making it even more imperative that state leaders take bold action to counter wealth and income concentration and safeguard essential services that contribute to the health, well-being, and economic security of all Californians.
Proposed Budget Assumes a $16.8 Billion Improvement in the Revenue Outlook Over the January Projections
The governor’s budget proposal assumes that state General Fund revenues across the three-year budget window — covering fiscal years 2024-25 through 2026-27 — will be $16.8 billion higher than projected in the January budget proposal, before accounting for the estimated $1.3 billion revenue increase from the governor’s tax policy proposals (see Tax Policy section). This largely reflects continued growth in personal income tax collections, driven mainly by a strong stock market, which results in income gains for high-income Californians, who pay higher tax rates under the state’s progressive tax system.
The administration’s revenue projections are lower than the Legislative Analyst’s Office (LAO) estimates, which recently projected that General Fund revenues from the state’s three largest revenue sources — personal income taxes, corporate taxes, and sales taxes — will be $25 billion higher than the governor’s January projections across the three-year budget window, also due mainly to personal income taxes.
Both the administration and the LAO acknowledge that the current stock market trends may not be sustained, particularly as stock market gains have been driven primarily by what may be an “AI bubble” that could burst, which would negatively impact the state’s revenues in the future. Additionally, the administration notes additional risks to the economic and revenue forecasts stemming from the Iran war and the potential for prolonged elevations in oil and gas prices as well as the impacts of tariffs.
The administration’s revenue forecast accounts for a moderation in stock market growth but not a significant downturn. If such a downturn were to occur this year, the administration estimates that revenues could be $15 billion to $20 billion lower than the current estimates across the budget window, even without an economic recession. However, revenue estimation is highly uncertain and there is no way of knowing with certainty when such a reversal in the stock market might occur and when the impacts on the California budget would materialize.
While the increased revenue projections improve the budget condition, it’s important to keep in mind that around half of new revenues are constitutionally required to go to K-14 education spending (see Proposition 98 section), budget reserves, and debt repayments (see Reserves section).
H.R. 1 and the Federal Budget
H.R. 1, the harmful Republican mega bill passed in July 2025, will deeply harm Californians by cutting funding for essential programs like health care, food assistance, and education.
See how California leaders can respond and protect vital supports.
Governor Proposes Tax Policy Changes to Generate Ongoing Revenue
Tax revenues are the foundation of a well-functioning state that ensures its residents can access the basics like affordable housing, health care, and child care, offers quality cradle to career education, and provides businesses with the resources they need to thrive, such as a skilled workforce and public infrastructure. But California’s revenue and governance structure hasn’t kept pace with a dramatically changed world.
California is facing multiple challenges that impact the state budget and the lives of Californians: growth in state revenues is projected to lag behind the growing costs of meeting the needs of Californians, and deep federal cuts to health care and food assistance enacted last year through H.R. 1 are continuing to go into effect, with many of the harshest policies set to begin later this year and in 2027. Meanwhile, profitable corporations and wealthy households have been gifted with federal tax breaks through H.R. 1 and the previous round of Trump tax cuts in 2017. The state will need significant additional revenues in order to maintain existing critical services, blunt the harms of the federal cuts, and continue making progress on better meeting Californians’ needs.
The governor’s revised budget takes steps to increase ongoing state revenues and ensure highly profitable corporations are paying their fair share in state taxes, but much more will be needed. The budget includes tax policy changes that, on net, are estimated to raise about $1.3 billion in 2026-27 and $2.5 billion in future years. This does not include the impacts of the Managed Care Organization tax, which allows the state to draw down additional federal funding to support the Medi-Cal program (see Medi-Cal Provider Taxes & Fees section).
Instituting a permanent limit on business tax credits.
Starting in tax year 2027, when the current temporary business tax credit limit will have expired, the total amount of tax credits a business can claim in any year is limited to 50% of the taxes it would owe before applying credits or $5 million, whichever is higher. This helps ensure that highly profitable corporations are not able to reduce their taxes down to the $800 minimum tax. The administration estimates this limit would increase General Fund revenues by $850 million in 2026-27 and around $1.7 billion ongoing and would likely impact fewer than 100 companies that have California profits of more than about $57 million.
However, the new limit would not impact businesses’ ability to claim refunds for the tax credits that were limited by the temporary $5 million cap during tax years 2024 through 2026. These refunds are expected to cost the state $6.8 billion spread across fiscal years 2026-27 through 2034-35. Additionally, the limit would not apply to film tax credit recipients electing to either use the credit against their sales tax liability or to take it as a refundable credit.
The governor’s proposal is a critical first step to ensuring more corporations pay their fair share in state taxes. According to the Department of Finance, in 2023 there were 342 corporations with California profits above $100 million, of which 80 (23%) reduced their tax liability by at least half, and around 20 of those corporations were able to nearly zero out their tax bills.
Setting a cap at the higher of 50% of tax liability or $5 million means small businesses will not be affected, but some very profitable corporations with large stockpiles of tax credits will be able to cut their taxes by far more than $5 million a year. For instance, a corporation with $500 million in California taxable income would regularly have a tax bill of $44.2 million, but under the new limit it would be able to reduce that by half if it has available credits, down to $22.1 million. Policymakers may consider whether a smaller percentage cap would be more appropriate, which would raise additional annual revenue by requiring corporations to spread tax credit usage out across a longer time period. State leaders should also reconsider allowing businesses to claim refunds for the tax credits limited by the temporary $5 million cap during the 2024-26 period to align with this new policy and avoid unnecessary state revenue losses.
Applying the sales tax to software purchases downloaded or accessed online.
Currently, the state’s sales and use tax only applies to sales of physical goods — not digital goods or services — even as the economy has become increasingly digital and service-based. This has resulted in declining sales tax revenues relative to the economy. Software purchased on a CD or thumb drive is taxable, but software downloaded or accessed remotely is not. Most other states already tax electronically delivered software, and many other states tax additional digital goods and services. The administration proposes expanding the sales tax to include prewritten (not custom) software, regardless of how it is accessed.
The state’s 7.25% sales and use tax is separated into several different components supporting different funds. About 3.7% goes to the state’s General Fund and the remainder goes into funds to support local health and human services and public safety — including services that were “realigned” from the state to counties in 1991 and 2011 — as well as general county and city operations and local transportation programs. Additionally, counties, cities, and special districts can impose their own sales tax add-ons. The proposal is estimated to generate $450 million in General Fund revenues in 2026-27 and around $900 million ongoing. Additionally, it will increase local tax revenues by an estimated $560 million in 2026-27 and $1.1 billion ongoing.
Cutting the first-year $800 minimum franchise tax to $400 for certain businesses.
This change would apply only to businesses not organized as corporations, such as limited liability companies (LLCs) and partnerships. Corporations are already fully exempt from the minimum tax in their first year of operations, and while this creates an inequity between different types of businesses, the Legislative Analyst’s Office has recommended policymakers eliminate the first year minimum tax exemption entirely because it is not well-targeted to help small businesses and is unlikely to significantly impact new business formation. The governor estimates that the proposal to halve the minimum tax for non-corporate business would cost about $100 million annually, while the LAO estimated that eliminating the first-year exemption for corporations could raise $100 million to 150 million annually.
Allowing the deferral of state taxes on gains in “Trump Accounts.”
Last year’s H.R. 1 introduced a new type of tax-deferred savings account for children dubbed “Trump Accounts,” which are similar to traditional Individual Retirement Accounts. The governor proposes applying the same state tax treatment to Trump Accounts as the federal government, except that the additional tax on early withdrawals would be 2.5% instead of the federal 10% — in line with California’s additional tax on early withdrawals from other tax-advantaged savings accounts.
The administration estimates this will cost $1 million General Fund in 2026-27 and increase to $3 million by 2029-30. While this does not have large budget implications, Trump Accounts — like most tax advantaged savings accounts — disproportionately benefit higher-income families who have the means to make significant contributions into the accounts, likely increasing wealth inequality. This is distinct from a “baby bond” program targeted to lower-income families who have fewer wealth-building opportunities, which aim to narrow wealth gaps.
Maintaining the January proposal to extend the California Competes tax credit.
The current credit program is set to expire after 2027-28, and the governor proposed extending it for an additional five years. California Competes credits, discussed here, are allocated on a competitive basis to businesses that commit to making investments and creating jobs in the state, and the annual allocation would continue to be capped at $180 million. The budget impacts of the credit extension will begin in 2028-2029.
The governor’s tax proposals would generate greatly needed long-term revenue to support state services, and would ensure more profitable corporations are reasonably contributing to state tax revenues. But given the growing unmet needs of Californians, additional revenues will be needed to protect and expand critical state services. Another complementary reform to ensure large multinational corporations are not essentially zeroing out their state tax bills is eliminating the “water’s edge” loophole that allows corporations to avoid up to around $3 billion in state taxes each year by stashing profits in offshore tax havens.
Senate leadership has called for additional revenues, proposing to raise around $5 billion to $8 billion to support the Medi-Cal program by requiring large employers to make a “Fair Share Contribution” to support the costs of providing Medi-Cal for their workers when the employer is not offering them affordable health insurance.
Building a real California for All, and responding to federal cuts, will require policymakers to embrace bold revenue solutions to cover the increasing costs of providing existing services due to inflation and a changing population and better meet the growing needs of Californians.
Revised Budget Projects Nearly $30 Billion in Reserves, Sets Aside Nearly Another $10 Billion for Next Year
California has several state reserve accounts that set aside funds for a “rainy day” when economic conditions worsen and state revenues decline. Some reserves are established in the state’s Constitution to require deposits and restrict withdrawals, and some are at the discretion of state policymakers.
California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the “rainy day fund.” Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenue in a given year exceeds 8% of General Fund tax revenue. For 15 years — from 2015-16 to 2029-30 — half of these funds must be deposited into the rainy day fund, and the other half is to be used to reduce certain state liabilities (also known as “budgetary debt”).
Prop. 2 also established a new state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA). The PSSSA requires that when certain conditions are met, the state must deposit a portion of General Fund revenues into this reserve as part of California’s Prop. 98 funding guarantee.
In order to access the funds in the BSA and PSSSA, the governor must declare a state budget emergency — an action that was taken in the enacted current-year (2025-26) budget in response to the state’s projected budget deficit.
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
The BSA and the PSSSA are not California’s only reserve funds. The 2018-19 budget agreement created the Safety Net Reserve Fund, which is intended to hold funds to be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn, and which was completely spent down in response to recent years’ budget deficits. Subsequently, in 2024, the state created the Projected Surplus Temporary Holding Account, which is intended to hold anticipated surplus revenues for up to one year before spending them. Additionally, the state has a Special Fund for Economic Uncertainties (SFEU) — a reserve fund that accounts for unallocated General Fund dollars and that gives state leaders total discretion as to when and how they can use the available funds.
The governor’s revised budget projects $29.9 billion in reserves at the end of 2026-27. Specifically, the proposal:
Projects a BSA balance of $15.1 billion;
Projects the PSSSA balance at $10.3 billion;
Leaves the Safety Net Reserve with a zero balance; and
Projects an SFEU balance of $4.5 billion.
In addition, the revised budget proposes depositing $9.7 billion into the Projected Surplus Temporary Holding Account in 2026-27, then allocating these funds in 2027-28. As required by law, funds can only remain in this account for up to one year, after which they must be returned to the General Fund or spent. Senate democrats’ recent budget proposal also included setting aside $10 billion in 2026-27 to be used in 2027-28.
The revised budget also maintains the governor’s January proposal to suspend a “true-up” deposit into the BSA in 2025-26. State leaders suspended annual deposits into the BSA in 2024-25 and 2025-26 and withdrew funds to help address budget shortfalls. The state is now required to make a “true-up” deposit into the BSA, estimated at $5.4 billion in 2025-26, based on updated revenue estimates. The governor proposes suspending this deposit, but his revised budget reflects a deposit into the BSA of roughly $3.6 billion in 2026-27.
Finally, the revised spending plan makes the constitutionally required deposits into the PSSSA and includes a discretionary deposit of $1.6 billion (see section on Prop. 98).
Administration Highlights Ongoing Discussions Around Modifying the BSA
The governor’s revised budget highlights that the administration intends to continue discussions with the Legislature around potentially putting a constitutional amendment on the ballot to ask voters to make changes to strengthen the BSA. Both the Senate and Assembly democrats’ recent budget frameworks expressed the intent to increase the maximum size of the fund and make it easier to save more when state revenues are up. In addition, the Senate, which included significantly more detail in its plan, proposes to:
Increase the maximum size of the fund to 30% of General Fund tax revenues, up from 10%.
Reduce the annual revenue set-aside to 1% of General Fund tax revenue, from 1.5%, but require “additional spiking revenues” to be set aside.
Modestly increase the share of set-aside revenues deposited into the rainy day fund, while modestly reducing the share going toward debt payments, but extend the required annual debt payments beyond the current 2030 date and allow federal unemployment insurance loans to be repaid from this source of funds.
Change the relationship between deposits into and withdrawals from reserves and the state’s spending limit (Gann limit), making it easier for policymakers to build up reserves during years when state revenues are strong and the state is at risk of exceeding the limit.
Although building up reserves is important to protect against future downturns and manage fluctuations in state revenues, as state leaders further refine the specific changes to put before voters it will be important to balance saving for a rainy day with meeting the urgent needs Californians have today.
Health
Governor’s Revised Budget Misses the Mark on Health Care
Access to health coverage makes it possible for people to receive regular checkups, fill a prescription, and get treatment when they are sick or injured. Health coverage also supports financial security by helping people avoid high medical costs and debt.
Medi-Cal, California’s Medicaid program, provides free or low-cost coverage to more than one in three Californians, including children, pregnant individuals, seniors, and people with disabilities. As a cornerstone of the state’s health care system, Medi-Cal helps millions of Californians access care and maintain financial stability while also supporting hospitals, clinics, health care workers, and local economies across the state.
Last year, federal and state policymakers made deep cuts to Medi-Cal that reversed progress toward a more inclusive and equitable health system. Republicans in Congress and the Trump administration enacted the deepest health care cuts in US history. At the state level, policymakers approved significant cuts to Medi-Cal in the 2025 Budget Act that marked a major shift away from the state’s commitment to expanding health care access for all Californians. While the governor’s May Revision takes some steps to reduce harm caused by recent federal cuts, it continues policies that put Californians’ health coverage and access to care at risk.
May Revision Reflects Impact of Federal Policy Changes
The governor’s May Revision reflects implementation of new federal policy changes under H.R. 1 — the harmful Republican megabill signed by President Trump last year. The revised budget includes about $1.5 billion in new General Fund spending related to H.R. 1 in 2026-27 and reduced General Fund spending of $1.9 billion by 2029-30. The administration projects Medi-Cal disenrollment of 44,000 people in 2026-27, growing to 1.3 million people by 2029-30 due to H.R. 1.
The governor’s May Revision reflects the following actions and policy changes related to implementation of H.R. 1:
Denying full-scope Medi-Cal coverage to immigrants with humanitarian status.
Full-scope Medi-Cal provides comprehensive health coverage, while restricted scope Medi-Cal only covers emergency and pregnancy-related services. Due to H.R. 1, many groups of immigrants will no longer be eligible for full-scope Medi-Cal starting October 1, 2026. The governor’s revised budget delays this shift until July 2027, allowing about 200,000 immigrants with humanitarian status to keep full-scope Medi-Cal for nine additional months. The administration estimates this delay would result in a General Fund cost of $668.1 million in 2026-27. However, the governor’s proposal ultimately leaves these immigrants with very limited services in the long term. Starting January 1, 2027, there will also be a transition for this group to a fee-for-service delivery system.
Loss of federal funding for emergency care for immigrants.
Starting October 2026, California will no longer receive a 90% federal funding match for emergency services provided to immigrants who would otherwise qualify for the Affordable Care Act (ACA) expansion if not for their immigration status. Instead, the federal match will be reduced to 50%. As a result, the May Revision includes $669 million General Fund in 2026-27 to backfill the lost federal funds and maintain current emergency care services, with the state expected to face ongoing General Fund costs in future years that would fluctuate annually.
Implementation of work requirements.
The May Revision projects reduced Medi-Cal spending by $357.6 million ($90.3 million General Fund) in 2026-27 and $9.6 billion ($2.4 billion General Fund) by 2029-30 due to new federal work requirements for adults in the ACA expansion population starting January 1, 2027. This group generally refers to low-income adults under age 65 without dependents. Work requirements create additional paperwork and administrative barriers that often cause people to lose health coverage even when they are still eligible.
Reduced Medi-Cal retroactive coverage.
Starting January 2027, many people will receive less help paying for medical care they received before applying for Medi-Cal. Currently, Medi-Cal covers up to three months of past care, which is important for people who delay applying due to illness, paperwork, or other barriers. This policy change cuts that to just one month for ACA expansion adults and two months for all other applicants. The administration estimates this change would result in a General Fund reduction of $34.6 million ($14.7 million General Fund) in 2026-27, increasing to $75.5 million ($32.1 million General Fund) annually in 2029-30 and ongoing.
Increased eligibility checks.
Under H.R. 1, California will be required to check eligibility for adults in the ACA expansion population twice a year instead of once a year. Based on recent federal guidance, California is now expected to begin implementing the six-month renewals in March 2026, but coverage losses due to this change are not expected until October 2027. The administration still expects that, over time, these eligibility checks will cause many people to lose coverage — an estimated 278,600 people by 2029-30. As a result, the May Revision projects reduced total Medi-Cal spending of $747.3 million ($186.4 million General Fund) in 2027-28 and $2.5 billion ($633 million General Fund) by 2029-30.
Another federal policy change will require California to transition about 2 million undocumented adults and certain other immigrants from managed care into a fee-for-service Medi-Cal delivery system beginning January 1, 2027. This change stems from federal guidance issued in September 2025 that restricts how states can use federal Medicaid funds for immigrants who are not eligible for federally funded Medicaid coverage.
A key consequence of this change is that these Californians will lose access to Enhanced Care Management and Community Supports. These services pair intensive care coordination with non-clinical supports such as housing assistance, medically tailored meals, recuperative care, and other services that help people meet basic needs. The May Revision reflects a reduction of $583.8 million ($471.6 million General Fund) in 2026-27 and $1.5 billion ($1.2 billion General Fund) ongoing tied to this federal policy change.
Governor’s Revised Budget Continues Rolling Back Health Care for All
The 2025 Budget Act included significant state-imposed cuts to Medi-Cal, including freezing new enrollment for undocumented adults, imposing new Medi-Cal premiums on certain immigrants, and reducing payments to Medi-Cal providers. The governor’s revised budget builds on those actions with additional cuts and cost-shifting proposals that are not required under federal law. Together, these changes would further reduce access to health care and supportive services for immigrants, seniors, people with disabilities, and individuals managing chronic health conditions.
case Study: How a Tax on Wealthy Households Funds Schools, Health Care & More
Voters asked the top 2% of earners to contribute more — generating $9 to $10 billion per year for education, tax credits for families with low incomes, and a stronger, more resilient state budget.
The revised budget includes cuts that specifically target immigrant Californians:
Higher Medi-Cal premiums for certain immigrants from $30 to $50 per month. As part of the 2025 Budget Act, state leaders imposed $30 monthly premiums on undocumented adults and certain other immigrants effective January 2027 — a cost that would not apply to other Medi-Cal members. The governor’s revised budget increases this premium by $20 per month, making coverage unaffordable for many low-income Californians. This would reduce General Fund spending by $427.3 million in 2026-27 and $314.3 million annually in 2029-30.
Applying federal work requirements to immigrants who receive state-funded Medi-Cal. The governor’s revised budget maintains his previous proposal to impose the harmful federal work requirements on immigrants who receive health care through state-only Medi-Cal — even though there is no federal requirement to do so. Instead of protecting immigrant Californians, the governor is choosing to impose additional harm.
The May Revision also includes cuts that would affect seniors and people with disabilities. Specifically, the revised budget:
Reinstates Medi-Cal asset limits, which were eliminated in January 2024 and partially reinstated in January 2026. This proposal would once again require seniors and disabled adults to limit their assets — such as savings, cash, second vehicles, and other financial resources — to $2,000 for an individual or $3,000 for a couple in order to qualify for Medi-Cal, effective no sooner than January 1, 2027. Asset tests can penalize modest savings and create complicated eligibility rules for seniors and people with disabilities, forcing some people to spend down limited resources in order to qualify for and maintain Medi-Cal coverage, including long-term services and supports. The administration estimates this proposal would result in about 25,000 people losing Medi-Cal in 2026-27 and an additional 37,000 in 2027-28 — a total of 62,000 people losing coverage within the first two years. These changes would reduce General Fund spending by $278.3 million in 2026-27 and $495.6 million ongoing, including impacts to In-Home Supportive Services.
Maintains cuts to In-Home Supportive Services (IHSS).
Maintains cuts to In-Home Supportive Services (IHSS), a program that helps seniors, individuals who are blind, and people with disabilities remain safely in their homes by providing assistance with daily activities and personal care. The governor maintains a proposal to shift additional IHSS costs to counties by changing how the state funds growth in IHSS service hours. This proposal could create pressure to reduce or limit service hours, leaving some Californians without the support they need. The revised budget also maintains a proposal to eliminate the IHSS backup provider system, which helps connect recipients with backup caregivers when their regular provider is unavailable. These proposals would reduce General Fund spending by $233.6 million beginning in 2027-28 and $3.5 million in 2026-27.
Lowers payment rate caps for PACE providers (Program of All-Inclusive Care of the Elderly).
Lowers payment rate caps for PACE providers (Program of All-Inclusive Care of the Elderly), which provide comprehensive, community-based care to seniors with complex health and social needs. The revised budget would implement a lower payment rate cap beginning January 1, 2027, except for new entrants in their first two years. The 2025 Budget Act already included a payment rate cap for PACE organizations at the mid-point rate beginning in 2027, and the revised budget would further reduce payments to the lower bound rate. Lower payment rates may make it more difficult for providers to meet individualized care needs or expand services for older adults who rely on the program. The administration estimates this proposal would reduce General Fund spending by $33.7 million in 2026-27 and $80.9 million ongoing.
The revised budget also proposes broader cuts to Medi-Cal services and supports that many Californians rely on to manage chronic conditions, access care, remain safely housed, and meet daily health and basic needs, including:
Eliminating acupuncture as a Medi-Cal benefit. This change would reduce General Fund spending by $5.4 million in 2026-27 and $13.1 million ongoing.
Cutting Enhanced Care Management. New eligibility and utilization management rules would take effect January 1, 2027. These changes would reduce General Fund spending by $41.4 million in 2026-27 and $99.2 million ongoing.
Reducing access to Community Supports. The revised budget would change referral pathways, eligibility criteria, service definitions, and utilization management rules for select Community Supports services effective January 1, 2027. These changes would reduce General Fund spending by $26.9 million in 2026-27, $58.8 million in 2027-28, and $51 million ongoing.
Making changes to Applied Behavioral Analysis (ABA) services, transportation services, and a Medi-Cal managed care quality incentive. The revised budget proposes new utilization management requirements, including stricter reviews and prior authorization requirements, that would apply to ABA and Medi-Cal transportation services. The governor also proposes to eliminate an incentive program that rewards health plans for meeting quality benchmarks and improving care outcomes. Together, these proposals would reduce General Fund spending by $68 million in 2026-27, increasing to $552 million by 2029-30.
Redirecting Medi-Cal funds to the General Fund. The governor proposes to move medical loss ratio remittances — funds returned by Medi-Cal managed care plans when they do not spend enough on patient care — away from Medi-Cal. This would reduce General Fund spending by $25 million ongoing beginning in 2027-28.
New Health Investments
Although the May Revision does not introduce bold new investments to reverse harmful state and federal actions, it does include smaller, but meaningful investments. Specifically, the revised budget:
Maintains funding for reproductive health care providers. This one-time $60 million General Fund investment for the 2025-26 fiscal year would help reproductive health centers facing federal funding cuts tied to abortion services.
Provides funding to maintain HIV services and support LGBTQ+ community centers. This one-time $60 million investment from the AIDS Drug Assistance Program Rebate Fund in 2026-27 includes support for HIV-related services affected by federal cuts and LGBTQ+ community centers experiencing funding losses.
Invests in menopause awareness and education. This one-time $3 million General Fund investment would support a statewide public awareness campaign on perimenopause and menopause.
Provides short-term support for struggling hospitals. The revised budget includes up to $50 million General Fund in 2026-27 for hospitals facing immediate financial distress. This proposal builds on recent state action to provide $25 million General Fund for this purpose.
Supports Sickle Cell Centers of Excellence. The May Revise includes $30 million General Fund over five years to support treatment and care for individuals living with sickle cell disease.
Additional Support for Covered California Members
For those who earn too much to qualify for Medi-Cal, Covered California — the state’s health insurance marketplace established through the Affordable Care Act (ACA) — serves as a vital resource. Covered California allows individuals and families to purchase health insurance, often with financial assistance to lower monthly costs. Over 1.9 million Californians rely on the state’s health insurance marketplace for their health coverage.
Health care costs are rising for many Californians, particularly after the expiration of enhanced federal premium tax credits that helped lower monthly premiums. As costs increase, some enrollees are shifting to lower-premium plans with higher deductibles and out-of-pocket costs in order to maintain coverage, potentially making it harder to afford care when they need it.
The governor’s revised budget includes an additional $110 million from the Health Care Affordability Reserve Fund to expand the state premium subsidy program for Covered California enrollees with incomes up to 200% of the federal poverty level. This proposal builds on actions state leaders took last year, when the governor and Legislature approved $190 million in state premium assistance for people with incomes up to 165% of the federal poverty level.
Federal policymakers should restore enhanced premium tax credits to help keep health coverage affordable at a time when many individuals and families already struggle with high health care costs. State leaders should also continue pursuing strategies to improve access to affordable coverage through Covered California.
Revised Budget Largely Sustains Behavioral Health Initiatives
Millions of Californians rely on services for mental health and substance use treatment, known as behavioral health care. Many of these individuals face housing insecurity, justice system involvement, or child welfare placement. Strengthening the state’s behavioral health system is essential to guaranteeing that every Californian can access the care they need, regardless of race, age, gender identity, sexual orientation, or where they live.
State policymakers have significantly invested in behavioral health treatment, workforce capacity, housing supports, and care coordination in previous years. The May Revision largely maintains these initiatives and continues implementation of Proposition 1, while relying heavily on non–General Fund funding sources and shifting some future costs to counties. At the same time, federal cuts and threats to behavioral health waivers create uncertainty for the long-term stability of California’s behavioral health system.
Maintaining Previous Behavioral Health Initiatives
In recent years, the state has invested about $8.5 billion across multiple departments to expand behavioral health treatment capacity and infrastructure. These investments include:
$4.2 billion for the Children and Youth Behavioral Health Initiative.
$2.9 billion for the Behavioral Health Bridge Housing and Behavioral Health Continuum Infrastructure programs.
$1.4 billion for Mobile Crisis Response.
Policymakers have also committed nearly $8 billion over five years to Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT), a multi-year initiative focused on improving access to behavioral health services for Medi-Cal members with significant needs, including children and youth involved in child welfare, people involved in the justice system, and individuals at risk of or experiencing homelessness. The May Revision largely maintains these major behavioral health initiatives, but does not propose significant new investments to further expand the system.
Proposition 1 Implementation
The revised budget continues implementation of Proposition 1 (Prop. 1), which voters approved in March 2024. Prop. 1 amended California’s Mental Health Services Act — now Behavioral Health Services Act (BHSA) — and authorized a $6.38 billion bond to fund behavioral health treatment, residential facilities, and supportive housing for veterans and Californians with behavioral health needs. Counties will begin operating under the revised funding structure under the BHSA in July 2026.
The May Revision proposes $315.9 million from the Behavioral Health Services Fund (BHSF) in 2026-27 for several state departments to implement the state-directed activities. These funds support behavioral health prevention and workforce programs and continue implementation of the BH-CONNECT Workforce Initiative. Of the $315.9 million BHSF proposed for 2026-27:
$174.8 million is for the Department of Public Health,
$131.1 million is for the Department of Health Care Access and Information, and
$10 million is for the Commission for Behavioral Health.
The revised budget relies on the BHSF in place of the General Fund for BH-CONNECT workforce activities, shifting $211.9 million in 2026-27, $229.1 million in 2027-28, and $226.4 million by 2029-30.
Crisis Response and Behavioral Health Care in Prisons
The May Revision includes behavioral health proposals related to community-based crisis response services and mental health care in state prisons. Specifically, the revised budget:
Maintains a proposal to make Medi-Cal mobile crisis services optional for counties beginning April 1, 2027.
The proposal follows the expiration of enhanced federal funding for these services in December 2026. The budget includes $431.5 million total funds — including Proposition 35 funds, federal funds, 988 funds, and General Fund support — to continue the benefit across 2025-26 and 2026-27 before shifting approximately $170 million in annual ongoing costs to counties beginning in 2027-28. Counties may face difficult tradeoffs as they absorb these ongoing costs, particularly amid broader behavioral health funding pressures and rising demand for services.
Includes funding for court-appointed receivership overseeing prison mental health services.
The revised budget includes $12.6 million in 2026-27 — supported by the Mental Health Services Deposit Fund, General Fund, and Behavioral Health Services Act funding — for staffing and clinician recruitment and retention. The proposal also includes funding allocations in future years, along with separate funding for resource teams and crisis intervention teams in state prisons.
Protecting and Strengthening California’s Behavioral Health System
County behavioral health departments continue to warn that Prop. 1 largely redirects existing mental health funding rather than providing significant new ongoing resources. At the same time, federal cuts under H.R. 1 and threats to federal behavioral health waivers could destabilize funding for behavioral health care, housing supports, and recovery services while increasing demand for county-based services. As California continues implementing major behavioral health reforms, state leaders should ensure counties and providers have the stable, ongoing resources needed to maintain access to care and support Californians with behavioral health needs.
Revised Budget Proposes New MCO Tax, Highlights Challenges to Hospital Fee
A key source of funding for Medi-Cal comes from taxes and fees assessed on health care providers, including private hospitals and health plans (also called managed care organizations, or MCOs). These taxes and fees are used to draw down additional federal funding for Medi-Cal, which allows California to reimburse providers, cover basic Medi-Cal costs that would otherwise be funded by General Fund dollars, and fund higher Medi-Cal payments to health care providers.
Provider taxes and fees need federal approval and must be periodically renewed. In California, most of the revenue raised by provider taxes/fees comes from two sources:
The MCO tax
The MCO tax currently generates over $7 billion per year in net revenue. MCO tax proceeds are used to boost Medi-Cal provider payment rates as well as to cover basic Medi-Cal costs, reducing California’s General Fund costs for the program.
The Hospital Quality Assurance Fee
The hospital fee raises over $5 billion per year. These revenues support supplemental payments to private hospitals and also cover basic Medi-Cal costs, reducing the state’s General Fund costs.
H.R. 1 changed federal rules to limit states’ use of provider taxes and fees. California’s current MCO tax expires at the end of 2026, and if the state receives federal approval for a new tax — which is not guaranteed — MCO tax revenue will decline substantially due to H.R 1’s restrictions as well as constraints imposed by Proposition 35, which California voters approved in 2024.
In addition, California’s hospital fee is in flux in the near term, but ultimately, revenue from the fee will also decline over the long term due to H.R. 1.
The governor’s revised 2026-27 spending plan acknowledges challenges to both the MCO tax and the hospital fee and proposes respective actions for each program. Specifically, the May Revision:
Proposes a new MCO tax to comply with H.R. 1 restrictions.
Under the governor’s plan, the state will seek federal approval for a new MCO tax to take effect on January 1, 2027.
Budget documents available over the weekend did not provide specifics about the structure of a new MCO tax. However, one document indicated that the proposed tax would have two components:
A tax that is “substantially similar” to the current MCO tax and complies with Prop. 35.
A tax that is “substantially dissimilar” to the current MCO tax and that is not subject to Prop. 35.
The governor estimates the new tax would provide $575 million in 2026-27, $2.3 billion each in 2027-28 and 2028-29, and $1.7 billion in 2029-30 to support Medi-Cal and maintain provider payment rate increases for primary, maternal, and non-specialty mental health care.
Notably, these amounts are substantially less than what the current MCO tax provides and assume the federal government will approve this renewal.
Highlights the Trump administration’s rejection of California’s recent proposal to update the Hospital Quality Assurance Fee program.
After the federal government notified California that the state’s initial proposal for the hospital fee program would not be approved, California submitted a new waiver request in March. The newest request is still awaiting federal approval, although the revised budget notes that the 2025 hospital fee program is expected to provide $5.5 billion in payments to hospitals.
Counties Need More Support to Manage Federal Health Care Changes
The revised budget includes some additional funding to help counties implement major federal health policy changes tied to H.R. 1 and Medi-Cal eligibility operations, including new work requirements and more frequent eligibility checks. To help manage the increased administrative workload associated with these federal changes, the May Revision proposes a one-time increase of $262 million ($74 million General Fund) in 2026-27 for county administration. In addition, the May Revision includes $33 million for optional “surge staffing” support that counties could request for administrative activities such as data entry, application and renewal processing support, and responding to general call center inquiries. This funding is intended to provide supplemental administrative support capacity rather than directly expanding county eligibility staffing.
However, counties have indicated they will need significantly more funding to administer the new requirements effectively and help prevent eligible people from losing Medi-Cal coverage due to paperwork burdens or administrative barriers. Counties have also requested substantial additional support to address broader H.R. 1 impacts on county indigent care programs, public hospitals, behavioral health systems, and eligibility operations.
As more Californians lose Medi-Cal coverage due to new federal requirements and administrative hurdles, counties will likely face growing costs to provide care for uninsured residents who still need health services but can no longer access coverage.
State Leaders Can Protect Health Care Access Instead of Cutting Services
The governor and Legislature should work together to pursue alternatives to the harmful cuts that the May Revision outlines, many of which would disproportionately harm Californians who already face significant barriers to care, including immigrants, older adults, disabled people, and people with behavioral health needs.
Legislative leaders have already put forward proposals that would better protect access to health care and supportive services for Californians while helping address the state’s fiscal challenges. These proposals demonstrate that California has options beyond reducing coverage, limiting benefits, and shifting costs onto counties and low-income Californians.
At a time when federal policymakers are already undermining access to coverage and care, state leaders should prioritize policies that protect access to health care and support the long-term health and economic well-being of Californians.
Housing
May Revise Falls Short in Protecting California Renters
Access to a stable and affordable home is foundational to a healthy and prosperous life — especially for the more than 44% of Californians who rent their homes. Yet renters, predominantly Californians with low incomes, continue to face the greatest housing affordability challenges and are often left with little recourse when they’re on the brink of losing their homes or facing eviction. This hardship is also deeply unequal, as immigrants, and Black, Pacific Islander, and Latinx Californians are more likely to rent and have unaffordable costs due to longstanding racist and discriminatory policies that have blocked access to economic mobility and homeownership.
Yet the Governor’s May Revise does little to address California renters’ immediate housing stability needs or strengthen protections for those at risk of losing their homes. Notably, the May Revision:
Does not provide funding for the expanded Renter’s Tax Credit included in the 2025-26 Budget Act.
Provides no additional support for renters displaced by disasters, including the 2025 Los Angeles wildfires.
Includes no new investments targeted for eviction legal defense or the judicial Homelessness Prevention program, even though formal evictions in California have surpassed pre-pandemic levels.
At the same time, the administration is proposing $100 million ($56 million General Fund and $44 million in existing National Mortgage Settlement Funds) for a new Disaster Rebuilding Fund to reduce borrowing costs and facilitate access to private financing for impacted homeowners. While these efforts are commendable, there is no comparable state assistance for renters who were also displaced or destabilized.
The May Revision does include six permanent positions and $838,000 in 2026-27, 2027-28, and 2028-29 for the Civil Rights Department (CRD) to reduce complainant wait time and increase settlements of employment and housing complaints. CRD enforces California’s Fair Employment and Housing Act (FEHA) which prohibits discrimination based on a protected characteristic, such as gender, race, national origin, sexual orientation, gender identity, or religion.
Still, the lack of investment in targeted legal eviction prevention is especially concerning given that evictions reached a high in 2024, the Homelessness Prevention program is nearly depleted, and more Californians are being pushed into homelessness faster than the state’s response systems can keep up (see Homelessness section). Plus, many legal aid providers that offer eviction defense are increasingly stretched, with some forced to shift limited capacity toward immigration-related legal services as federal enforcement pressures drive the need for assistance (see Immigration section).
May Revision Adds Red Tape to Homelessness Funding Without New Investments
California has both the resources and the responsibility to ensure every resident has a stable, dignified place to call home. In 2025, homeless service providers served over 358,000 Californians experiencing homelessness — demonstrating both the scale of need and the increased capacity of the state’s response systems. This progress was driven largely by prior one-time state investments that fund critical homelessness prevention and resolution services. These investments have produced real, measurable results, including the fact that over 110,000 Californians have been moved into permanent housing since 2023.
However, the May Revise maintains the administration’s stance from their January proposal on not including any additional or ongoing funding to address homelessness beyond what was promised last year. The revision reflects $500 million for Round 7 of the Homeless Housing, Assistance and Prevention Grant program (HHAP) in 2026-27. This is in contrast to the Senate’s budget plan which proposed an additional $500 million for HHAP Round 7, bringing the total to $1 billion. The Senate plan also went further by proposing an additional $1 billion for HHAP Round 8, for which the May Revise proposes no funding.
The administration stated HHAP Round 7 will require additional accountability measures, including having a pro-housing designation, local matching funds, and a compliant housing element. While encouraging local governments to become partners in addressing homelessness has merit, tying service provider funding to decisions outside of their control — such as a local government having a pro-housing designation or a compliant housing element — is problematic. Depending on the specific details of the proposal, a matching fund requirement may also be insurmountable for many localities currently facing budget deficits.
Additionally, the May Revision maintains the proposed reductions for the Bringing Families Home (BFH), Home Safe, and Housing and Disability Advocacy programs. Both BFH and Home Safe will sunset soon without additional funding, despite strong evidence they are effective.
Starting January 1, 2027, the May Revision would narrow ECM eligibility, redefine services, and adjust payments — effectively reducing access to intensive care coordination for Medi-Cal members with complex health and social needs. These changes would reduce General Fund spending by $41.4 million in 2026-27 and $99.2 million ongoing.
Cuts to Medi-Cal Community Supports (CS).
Starting January 1, 2027, the revised budget would tighten eligibility, referral pathways, service definitions, and utilization management criteria. These changes could reduce access to services that help members maintain stable housing, recover from illness, and meet other basic needs. It is also unclear how these changes would interact with the upcoming Behavioral Health Services Act Integrated Plans as CS are a core component. The administration estimates these changes would reduce General Fund spending by $26.9 million in 2026-27, $58.8 million in 2027-28, and $51 million ongoing.
Federal Threats to Homelessness
Lastly, the administration does not address the ongoing threats to federal rental assistance programs or the Continuum of Care program. It also includes no funding for Californians holding Emergency Housing Vouchers set to expire by the end of the year as Congress failed to provide enough funding to fully transition all recipients onto standard housing vouchers.
The Administration Fails Again to Prioritize Funding for Affordable Housing
Every Californian deserves a safe, affordable home — an attainable reality in a state as resourceful as California. Over the past seven years, state policymakers have made notable progress in streamlining housing development and have invested in affordable housing. However, state General Fund dollars have comprised only a small share of funding to support affordable housing development, and this share has drastically declined in recent years. This harmful trend continues as the revised budget, as with the January proposal, once again proposes no new state funds for affordable housing.
Instead, the May Revision continues to emphasize the new California Housing and Homelessness Agency (CHHA), set to launch in July, as its answer to the housing shortage. The administration includes resources to support the continuity of operations as the agency reorganizes, including transferring positions and other needs. It also proposes:
Statutory language making affordable housing projects ineligible for competitive state funding if the local government serving as lead or co-applicant imposes development impact fees on the project. These provisions would apply to funding notices issued after July 1, 2027.
Reappropriating $7 million of unawarded Infill Infrastructure Grant Program funds to assist construction of additional infill infrastructure and housing projects.
This stands in stark contrast with the Senate’s budget plan which would provide $1 billion for affordable housing programs, including the Multifamily Housing Program and state Low Income Housing Tax Credits — both of which are critical to building homes for Californians with the lowest incomes. The Senate plan also proposes $1 billion for homeownership programs, including the California Dream for All program which provides shared appreciation loans for certain first-time homebuyers, and the CalHOME program to help in the construction of affordable housing. The governor’s May Revision fails to fund these programs.
The administration is also silent on the California Air Resources Board (CARB) proposed regulations for the Cap-and-Invest program, which would drastically reduce revenue for the Greenhouse Gas Reduction Fund, effectively zeroing out funding for the Affordable Housing and Sustainable Communities program (AHSC). AHSC was restructured by the administration and the Legislature just last year to provide more funding for certain affordable housing projects. It also does not express support for the Affordable Housing Bond Act of 2026, currently moving through the Legislature, which can provide critical funds to several nearly depleted affordable housing programs — a bond Assembly Democrats explicitly support.
Economic Security
Governor’s Budget Falls Short in Preparing for Significant CalFresh Cuts
The Supplemental Nutrition Assistance Program (SNAP) — known as CalFresh in California — is the state’s most powerful tool in the fight against hunger. The federal Republican megabill, H.R. 1, introduced historic cuts to the SNAP program, which will reduce household monthly benefits for the 5.5 million Californians who depend on CalFresh to put food on the table.
Additionally, roughly 1 million Californians are at risk of losing their CalFresh assistance entirely due to expanded time limits and eligibility restrictions tied to immigration status. The revised budget proposes some funding to mitigate the harm, but falls significantly short of addressing the need. Specifically, the revised budget includes:
$30 million one-time funding for counties to support additional workload associated with implementing the burdensome CalFresh time limits expanded by H.R. 1. This amount is less than one-third of what counties anticipate spending in the 2026-27 fiscal year, according to a recent budget hearing, to prepare for the time limit implementation that will begin June 1, 2026.
$30 million one-time funding to support local food banks. The one-time funding would be in addition to the $8 million baseline funding the CalFood program receives, however it is a decrease from the annual $60 million allocation the program has received in recent years. In contrast, the Senate Democrats’ recent budget proposal included $100 million for CalFood to support local food banks.
The revised budget also maintains the commitment to expand the California Food Assistance Program (CFAP) to all income-eligible Californians ages 55 and older in October 2027, but makes no commitment to further expand the program to support humanitarian immigrants under the age of 55 and people impacted by the time limits. The May Revision also maintains full funding for universal school meals and the SUN Bucks program. However, the expected rise in food insecurity as people begin to lose their food assistance requires much bolder action than this revised budget provides.
Revised Budget Maintains Funding for CalWORKs and Refundable Tax Credits
California’s cash assistance programs provide critical support for families, youth, and children with low incomes across the state. As California continues to face high poverty rates and millions of people are struggling to afford basic needs, programs such as the California Work Opportunity and Responsibility to Kids (CalWORKs) program and the state’s refundable tax credits remain essential tools for promoting economic mobility and reducing hardship. The governor’s revised spending plan maintains funding for these key supports but does not propose significant new investments to further strengthen assistance for California families with low incomes.
CalWORKs remains one of California’s core anti-poverty programs, providing modest cash assistance and supportive services to families with low incomes, particularly Black and Latino families who face longstanding inequities in income and wealth. The revised budget largely preserves funding for this program at previous years’ levels, but does include a 1.8% increase to CalWORKs grants, estimated to cost $59.6 million in 2026-27. This increase is required under AB 85 (2013), which links annual grant increases to growth in certain 1991 realignment revenues deposited into the Child Poverty and Family Supplemental Support Subaccount, and does not require a General Fund appropriation.
case Study: Clever Strategy Allowed California to Raise New Revenue Following Federal Tax Cuts
In 2019, California selectively conformed to parts of the federal Tax Cuts and Jobs Act, enacted during President Trump’s first term, and raised over $1 billion in new, ongoing annual revenue — boosting K-14 education and expanding tax credits for working families.
At the same time, recent federal attacks and proposals that threaten funding streams supporting CalWORKs and other basic needs programs, like sunsetting funding for key housing support programs (see Homelessness section), underscore the importance of protecting and strengthening California’s core supports for children and families with low incomes. As economic pressures persist, maintaining existing investments alone will not be sufficient to ensure families can meet their basic needs and achieve long-term stability, highlighting the need for California to strengthen its tax base over the long-term to support investments that build toward economic security for all Californians.
Revised Budget Plan Slashes Programs and Services for Older Adults and Californians with Disabilities
All Californians should be supported and treated with dignity in their communities regardless of their age, ability, race, gender, or economic status. However, Californians with disabilities and older adults face significant barriers, with increased risks of not meeting their basic needs, experiencing poverty, and becoming homeless. In addition, older adults and people with disabilities are already facing increased instability due to new harmful policies from the Republican megabill H.R.1 that threaten their access to health care and food assistance.
Despite this reality, the governor’s revised budget disproportionately reduces the funding for and accessibility of programs that support older adults and Californians with disabilities, even though the services provided through programs like In-Home Supportive Services (IHSS) provide a lifeline to hundreds of thousands of Californians.
Maintains multiple harmful cuts from the January proposal to In-Home Supportive Services (IHSS) totaling almost $240 million in reductions across 2026-27 and 2027-28.
IHSS helps nearly 900,000 seniors, adults with disabilities, and children with low incomes live with dignity in their own homes. The proposed cuts to IHSS will limit the ability of recipients to access care if their usual provider is unavailable, restrict the number of hours of care recipients can receive, and shift costs to counties that are already straining under new responsibilities from H.R.1 (see Health section). IHSS recipients are likely to face uncertainty around benefits and may be unable to access the level of care they need, while providers — the majority of whom are related to recipients — may suffer from decreased incomes. These cuts come amidst the federal deferral of funds for IHSS, compounding the threat to the critical services provided by the program. State leaders should be protecting all vulnerable Californians from these threats, as reflected by the Senate’s budget plan, which proposes maintaining IHSS programs as they are, demonstrating a commitment to preserving programs that serve older adults and people with disabilities.
Reinstates Medi-Cal asset test limits for older adults and Californians with disabilities.
This proposal would bring back the Medi-Cal asset test limit for older adults and people with disabilities. This provision limits applicants to only $2,000 for an individual and $3,000 for a couple, instead of the current $130,000 per individual, in order to qualify for Medi-Cal (see Health section). These groups are the only ones subject to this punitive requirement, which could result in thousands of Californians being pushed off of Medi-Cal or force households to purposely reduce their resources to adhere to this strict limit. The administration estimates this proposal would reduce General Fund spending by$278.3 million in 2026-27 and $495.6 million ongoing, including impacts to IHSS.
Proposes multiple harmful provisions that will severely limit older immigrants’ access to Medi-Cal.
These harmful proposals, which include raising monthly premiums and denying full-scope Medi-Cal coverage to immigrants with humanitarian status, come at a time when immigrants are being targeted by the federal government (see Immigrant Californians section).
Eliminates $70 million General Fund in 2026-27 and ongoing for the Adult Protective Services (APS) expansion.
Adult Protective Services provides services to older adults and Californians with disabilities who require assistance to meet their needs or are victims of abuse, neglect, or exploitation. The governor’s May Revision rolls back funding for the age eligibility expansion approved in the Budget Act of 2021. This means only Californians ages 65 and older, instead of ages 60 and older, would be eligible for APS. This change would limit the scope of the program and restrict access to services that help the most vulnerable members of these communities.
Enforces a lower rate cap for Program of All-Inclusive Care for the Elderly (PACE) organizations.
The PACE model of care allows older adults to receive specialized short- and long-term care in their home, allowing them to remain independent and live safely in their community. Cuts to this service could push older adults into more fragmented systems of care that may not be suitable for their needs, lowering their quality of care (See Health section). The administration estimates this proposal would reduce General Fund spending by $33.7 million in 2026-27 and $80.9 million ongoing.
Other proposals in the revised spending plan include:
Maintaining the current investment in the Supplemental Security Income/State Supplementary Payment (SSI/SSP) program.
SSI/SSP is the largest cash assistance program serving low-income older adults and Californians with disabilities. However, current assistance levels fall short of ensuring recipients can meet their basic needs. These benefits are a key source of income for these communities and are becoming even more important as access to other federal and state programs is becoming more limited.
Investments in the Department of Developmental Services (DDS) to improve program administration.
This department provides individuals with intellectual and developmental disabilities a variety of services that allow them to achieve their goals. The revised budget makes multiple investments in DDS including:
$15 million ($12.4 million General Fund) to update the rate model methodology for certain early intervention services.
$11.4 million ($9.1 million General Fund) in 2026-27, $9.4 million ($7.1 million General Fund) in 2027-28, and $2.8 million ($2.4 million General Fund) ongoing to improve the intake process and develop a standardized assessment for clinical needs to improve consistency across the state.
$1.1 million ($779,000 General Fund) to address increased administrative burden on regional centers from federal changes in 2024.
Programs like Medi-Cal, IHSS, and SSI/SSP help to ensure that older adults and Californians with disabilities can receive the support they deserve and are able to meet their basic needs. The combined state and federal threats to multiple core programs could be devastating to the people in these communities that rely on them. The Senate budget framework reflects a stronger commitment to preserving these services and demonstrates the role state leaders should assume in protecting all Californians through the budget.
Child Care Expansion at an Indefinite Standstill Despite Substantial Need
Publicly funded child care plays an integral role in the healthy development of children and California’s economy. However, child care is a broken market in which families cannot afford to pay the cost of what it takes to provide care. As a result, child care is unaffordable for families, and pay is unsustainably low for providers.
California’s publicly funded child care programs play a critical role in helping to bridge this market failure by offering eligible families child care at low/no-cost, with family fees capped at 1% of a family’s income. The demand for these programs far exceeds the supply, with only 16% of children eligible for programs actually enrolled. Moreover, recent and ongoing federal threats to California’s child care funding increases the urgency for state leaders to provide needed resources to these essential programs.
Regarding child care funding and subsidized spaces, the governor’s revised budget:
Funds California Department of Social Services (CDSS) child care and development programs at $7.5 billion.
This amount is relatively unchanged from the January proposed budget. However, there are notable shifts in funding for individual child care programs. Specifically, the revised budget:
Cuts funding for the AP program and shifts the funds to General Child Care. The governor proposes to sweep, or take back, tens of millions of “unspent” AP program dollars despite counties’ high need for these AP program spaces. These AP dollars would be used to partially reverse cuts to the General Child Care program (CCTR) — cuts that the governor included in his January proposed budget. The CCTR cuts proposed in January were due to two factors: 1) a $75 million decrease in 2025-26 federal Child Care and Development Fund (CCDF) dollars and 2) a 2026-27 decrease in funding provided by Proposition 64, California’s voter-approved cannabis tax that dedicates a portion of its annual revenues to child care. However, the May Revision estimates that Prop. 64 revenues will be higher than assumed in January. With higher Prop. 64 revenues and the funds shifted from the AP program, the May Revision reduces the proposed cut to the number of CCTR spaces from 4,176 to approximately 1,007.
Does not fulfill promised 44,000 subsidized child care spaces.
In 2021-22, the governor committed to adding approximately 206,800 new child care spaces by 2026-27. Expansion was delayed and paused in 2023-24 and 2024-25; however, the 2024-25 budget did solidify a plan for rolling out the remaining spaces. Per this plan, as outlined in Senate Bill 163, the administration committed to funding 12,000 spaces in the CCTR program and 32,000 spaces in the Alternative Payment (AP) program, with the remaining spaces awarded in 2027-28. Similar to the January proposed budget, the revised budget does not provide funding for these promised spaces. Moreover, the revised budget does not include a plan for when these promised spaces will be funded, walking back the administration’s commitment to child care expansion. Contrary to the revised budget, the Senate’s budget plan would fund the promised 44,000 spaces, recognizing the importance of continuing to expand these critical child care programs. The Early Learning section provides more detail on how this proposal would be funded.
Includes modest funding for child care infrastructure.
While the revised budget does not expand child care spaces, it does include $11.8 million to support infrastructure improvements for child care providers, specifically targeting communities impacted by the 2025 wildfires, reflecting funding through Prop. 64 dollars redirected from the California Natural Resources Agency on a one-time basis. Additionally, the revised budget includes a $28 million one-time federal funding award to support provider relief efforts from disasters occurring in 2023 and 2024.
In addition to funding for subsidized spaces, California needs a stable child care provider workforce to sustain and expand programs. However, California child care providers continue to receive low wages, exacerbating racial and gender inequities and threatening to destabilize the system. In an effort to improve child care provider pay, in April 2023 the state began the process of developing an alternative methodology to pay providers based on the “true cost of care.” The state’s version of the alternative methodology was completed during summer 2025, and the state has since moved on to a process for determining how the “cost of care” estimates will result in a “single rate structure” for paying child care providers. Fundamental to this process is ensuring that the final rates reflect fair and just pay for providers. Related to provider pay, the revised budget:
Reduces the proposed cost-of-living adjustment (COLA) for child care providers.
The January proposed budget included a 2.41% COLA to the cost of care plus monthly rate supplements. The revised budget reduces this 2.41% to a 2.01% COLA. Notably, a 4.31% “super COLA” is included in the revised budget for TK-12 schools (see Education sectionEducation section). Thus, even though child care programs and TK classrooms both educate 4-year-olds, child care programs see a decrease in their COLA whereas TK-12 schools see an increase.
Halts implementing prospective pay for providers.
Prospective pay refers to paying child care providers in advance of or at delivery of child care services, supporting financial solvency and increasing workforce retention. Shortly before the revised budget was released, the federal administration reversed its requirement for states to pay providers prospectively. While states still have the option to do so, the revised budget reverts previously appropriated funding for prospective pay, signaling that the state is not moving forward with implementing prospective pay during the 2026-27 fiscal year.
Lacks clarity on timeline for implementing rates based on a single rate structure.
The 2025-26 budget appropriated $21.8 million for rate reform support costs, and the proposed budget does not include any additional funding for rate reform for CDSS. Given that CCPU and the state are not completely aligned on a single rate structure, it is unclear when rate reform is likely to be implemented or how much the state may need to spend to pay providers based on this new structure. As an effort to improve clarity, Assembly Bill 1981 proposes to require CDSS to provide the Chairperson of the Joint Legislative Budget Committee with an anticipated timeline for implementing the new rates under a single rate structure.
Revised Budget Continues to Impose Harm on Immigrants
Immigrants and their families are deeply ingrained in the state’s social fabric. They are members of the state’s workforce, pay taxes, attend schools, own businesses, and raise families who invest in local communities. Over one-half of all California workers are immigrants or children of immigrants, and more than 2 million Californians are undocumented, according to estimates. Undocumented immigrants in California make significant contributions to state and federal revenues, contributing $8.5 billion in state and local taxes in 2022, despite their exclusion from most public benefits.
Since 2025, state and federal policies have targeted immigrants, limiting their access to health care, food assistance, and other critical services, all while their lives have been severely under threat due to an unprecedented increase in immigration detention and deportation.
At a time when the federal government is increasingly attacking immigrant communities, it is more critical than ever that California state leaders ensure the safety and well-being of all people, especially undocumented immigrants, and maintain prior commitments to making an equitable state for everyone. In the revised budget, the governor continues to strip health care from immigrant Californians. Specifically, the 2026-27 revised budget:
Increases Medi-Cal premiums for certain immigrants.
Increases Medi-Cal premiums for certain immigrants from $30 to $50 per month — a cost that no other Medi-Cal members would have to pay. These premiums were originally proposed as part of the 2025 Budget Act and are set to go into effect in July 2027 for undocumented adults and certain other groups of immigrants, and now the governor is proposing making the premiums even higher. This will make health care even more unaffordable for many low-income Californians and lead to disenrollment (see Health section).
Denies full-scope Medi-Cal to immigrants with humanitarian status.
Shifts certain immigrants to fee for service Medi-Cal.
Due to recent federal guidance, California is now required to transition about 2 million undocumented adults and certain other immigrants from managed care into a fee-for service Medi-Cal delivery system effective January 1, 2027. While almost all services will still be available in the new delivery system, a key change is that they will lose access to Enhanced Care Management and Community supports, which pair care coordination with non-clinical supports such as housing assistance (see Health section).
In contrast to the governor’s revised budget, the Senate budget plan takes meaningful action to protect immigrant Californians. California Senate Democrats propose to delay both the elimination of dental benefits for certain groups of immigrants and the implementation of $30 monthly premiums to January 1, 2028. They also reject the governor’s proposal to deny full-scope Medi-Cal for immigrants with humanitarian status.
The governor’s revised budget does include some small, but meaningful, support for immigrants. The May Revision:
Maintains previous commitments to expand the California Food Assistance Program (CFAP) to include undocumented adults age 55 and older beginning in October 2027. However, it does not include any expansion to other age groups or account for the immigrant exclusions in H.R. 1 (see Food Assistance Section).
Provides one-time funding for immigration legal services. The governor’s revised budget includes $20 million in one-time General Fund dollars to help Californians who are facing immigration court proceedings. This legal aid comes at a critical time when immigrants’ lives continue to be under increased threat and immigration enforcement activity is heightened, though this is notably less than the $50 million in legal aid proposed in the Senate budget plan (see Protecting Renters section).
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Growth in Education Funding Continues Resource Expansion for Schools
Education begins in the earliest years, preparing children and youth to transition into the TK-12 and higher education systems. Publicly funded education programs play a critical role in the development, learning, and well-being of children and youth in California. Investing in them through these programs helps to ensure that children and youth are prepared for school and adulthood.
Growth in revenue estimates boosts funding to schools and community colleges through the Proposition 98 Guarantee. The revised budget proposal maintains significant new investments included in January and includes additional investments that expand services, help schools and colleges address rising costs, and strengthen prior initiatives. Given the instability of federal funds and other federal actions, these investments help ensure the state continues its commitment to addressing key educational challenges confronting Californians.
However, there are still major challenges ahead to ensure the state provides the resources to meet student needs, needs that also extend beyond education. Federal cuts to vital health care and safety net programs put students and families at greater risk of being able to make ends meet, thus putting their educational success at a greater risk. The May Revision does little to help address these federal cuts (see Health and Economic Security sections). Balancing across helping Californians meet basic needs and adequately funding TK-14 education is especially challenging considering the context of the current federal climate and state budget landscape.
Growth in Revenue Estimates Significantly Increases the Prop. 98 Guarantee
Approved by voters in 1988, Proposition 98 constitutionally guarantees a minimum level of annual funding for TK-12 schools, community colleges, and the state preschool program. The Prop. 98 guarantee reflects changes in state General Fund revenues, which means that increases or decreases to revenue estimates adjust the minimum guarantee funding levels. For example, when the state revenues increase due to policy changes or overall economic growth, funding available for TK-12 schools and the community colleges generally increases.
Under the 2026-27 revised budget proposal, Prop. 98 estimates increase by $24.5 billion across the three-year budget window compared to the estimates in the June 2025 enacted budget (this overall growth figure differs from Department of Finance’s figure of $28 billion because the Budget Center uses the 2026-27 projection from June 2025, as opposed to the 2025-26 estimate in June 2025). This growth is primarily driven by growth in revenues (see Revenues section), which also require the state to restore prior reductions and to increase deposit amounts into the Public School System Stabilization Account (also referred to as the Prop. 98 reserve).
The chart below shows updated projections of the guarantee as of the 2026 May Revision compared to projections in the January budget proposal and the June 2025 enacted budget.
Prop. 98 updated estimates and proposed adjustments in the revised spending plan include the following:
For 2024-25, the guarantee is revised up to $124.9 billion from prior estimates. Given revenue growth, this updated minimum guarantee level also reflects a higher maintenance factor payment, which is fully repaid under May Revision estimates. The maintenance factor represents the funding gap created when the state suspended Prop. 98 in 2023-24, and stronger revenues have allowed the state to fully close that gap.
For 2025-26, the guarantee is revised up to $125.1 billion from previous estimates. The governor maintains a proposal to fund the guarantee at a lower level than what the formulas require. In the revised spending plan, the governor reduces the size of the “settle-up” payment to $3.9 billion from $5.6 billion, which would provide schools and community colleges $121.1 billion rather than $125.1 billion. This approach serves two purposes: it helps prevent an overappropriation if revenues drop, and it helps balance the budget on the non-Prop. 98 side.
The 2026-27 estimate also increased compared to prior estimates — $1.6 billion higher in May compared to the January budget proposal. Also, compared to previous estimates, a withdrawal from the Prop. 98 reserve is no longer necessary to meet the guarantee in 2026-27.
The revised spending plan also adjusts deposits and withdrawals for the Prop. 98 reserve. Across the three-year budget window, the constitutionally required deposits increase to $8.7 billion. Moreover, the revised proposal also includes a discretionary deposit of $1.6 billion for a total reserve balance of $10.3 billion. See Reserves section for more on budget reserves.
Transitional Kindergarten and State Preschool Largely Continue as Planned
The California Department of Education (CDE) hosts two early learning and care programs: Transitional Kindergarten (TK) and the California State Preschool Program (CSPP). CSPP provides preschool to children ages 3 and 4 for families with low to moderate incomes (and temporarily to 2-year-olds until July 2027). TK serves 4-year-olds, and eligibility is based on age and is not dependent on family income. Together, CSPP and TK are cornerstones of CDE’s Universal Preschool plan, intended to bring more early learning and care options to 3- and 4-year-olds in California. However, as California strives to create a mixed delivery system that centers the needs of families, the administration has the opportunity to spend resources and implement policies in a way that integrates CSPP and TK with the broader early learning system to best support families with young children.
Fully funds Transitional Kindergarten and maintains commitment to reduced ratios.
As a final step to universal TK, the 2025-26 school year allowed all children who turn 4 by September 1 to enroll in TK. Moreover, the 2025-26 budget reduced student-to-teacher ratios from 1:12 to 1:10. The proposed budget maintains the complete rollout of TK and the reduced ratios. TK is primarily funded through the Proposition 98 Guarantee (see Proposition 98 section).
Augments but generally maintains CSPP funding for both community and school-based programs.
The January proposal reflected an increase of $136 million as compared with the 2025-26 budget, including $1 billion for community-based CSPP and $2 billion for school-based CSPP. This proposal is inclusive of the temporary expansion of CSPP eligibility to 2-year-old children until July 1, 2027. The revised budget largely maintains the proposed CSPP funding but contains the following augmentations:
A $910,000 one-time General Fund increase each fiscal year — 2026–27 through 2028–29 — for CDE to receive services from the Office of State Audits and Evaluations to provide support for CSPP audits.
Notably, the Senate’s budget plan to right-size CSPP funding and move community-based CSPP into Proposition 98 is not included in the revised budget. This proposed shift was intended to free-up General Fund dollars to partly fund the promised 44,000 child care and development program spaces (see Child Care section). The Senate’s proposal would result in additional General Fund dollars for much needed child care and development program spaces; however, there are considerations underlying this proposal that require further discussion.
Aligns with the California Department of Social Services (CDSS) child care and development programs on changes to provider pay.
Specifically, the cost-of-living adjustment (COLA) reduction from 2.41% to 2.01% (as discussed in the Child Care section) also applies to CSPP providers. Additionally, prospective pay implementation is suspended for CSPP providers (in addition to CDSS child care providers). Lastly, the revised budget includes $552,000 ongoing General Fund for CDE to implement the new single rate structure. These implementation dollars are not mirrored for CDSS child care and development programs (see Child Care section).
May Revision Boosts Education Funding with Ongoing and One-Time Resources
The largest share of Proposition 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to 5.9 million students. Education funding flows primarily through the Local Control Funding Formula (LCFF), an allocation mechanism that provides school districts, charter schools, and COEs a base grant per student, adjusted to reflect the number of students at various grade levels, as well as additional grants for the costs of educating English learners, students from low-income families, and foster youth. Other funds flow through a number of categorical programs such as the Expanded Learning Opportunities Program, special education, and other shorter-term investments.
Given growth in available resources for schools, the May Revision expands the investments included in the January budget proposal. The revised spending plan provides a higher than required cost-of-living-adjustment (COLA) to the school funding formula, provides a higher increase to special education, and substantially increases a one-time discretionary block grant for school districts. Notable adjustments in the May Revision include:
$2.5 billion to fund COLAs for the LCFF and other non-LCFF categorical programs.
The governor’s spending plan includes about $2.2 billion to provide a 4.31% COLA for the LCFF. The higher COLA reflects a statutorily required level of 2.87% ($1.3 billion) and a discretionary addition of 1.44% ($907 million), for a total of 4.31%, referred to as a “super COLA.” The discretionary amount is meant, in part, to provide resources needed to implement the pregnancy leave proposal. This proposal would require districts to provide TK-12 employees with up to 14 weeks of paid pregnancy disability leave starting in 2026-27. The revised budget plan also includes $261 million to provide a 2.87% COLA for other school programs, including the LCFF Equity Multiplier, Special Education, and Child Nutrition, among other categorical programs.
$2.2 billion to further increase per student funding for special education.
The January proposal included $509 million to ensure districts, charter schools, and county offices receive the same rate per pupil, and the increased investment of $1.8 billion would increase that per pupil rate to $1,340.
The May Revision also maintains other major ongoing investments, including $1 billion to sustain the California Community Schools Partnership Program and $62.4 million to further strengthen the Expanded Learning Opportunities Program (ELOP).
The revised spending plan also includes additional investments to support districts with increased costs and strengthen the education workforce, mostly through one-time investments. Those include:
A $5 billion one-time discretionary block grant for schools.
This investment reflects an increase of $2.2 billion for this grant compared to the January proposal. This grant would provide districts, charter schools, and COEs with additional dollars intended (but not required) to support:
Addressing school districts’ rising costs
Providing professional development for teachers, including literacy training to better support multilingual students, math and English Language Arts frameworks, and developmentally appropriate instruction for TK-3 teachers and administrators
Strengthening teacher recruitment and retention efforts
Expanding career pathways and dual enrollment for high school students.
More than half a billion dollars to support the education workforce through a mix of different investments.
The vast majority of these dollars are one-time resources. The largest is an allocation of $429 million to extend the Literacy Coaches and Reading Specialists Grant program, which provides funding to train literacy coaches and specialists, support students who need targeted reading intervention, and develop school literacy programs. Another notable proposal is an increase of $17.8 million for the Golden State Teacher Grant program — $16.2 million of that is ongoing. This program, administered by the California Student Aid Commission, provides grants to teacher candidates if they commit to serve in a high priority school. The intent of this increase, which is funded through federal sources, is to provide grants to prospective special education teachers.
Overall, the May Revision directs substantial additional resources toward California’s schools, with investments spanning ongoing increases to the school funding formula, special education, and a range of one-time workforce and programmatic grants.
May Revision Builds on Community College Investments
A portion (about 11%) of Proposition 98 funding provides support for California’s Community Colleges (CCCs), the largest postsecondary education system in the country, which serves high percentages of students of color and students with low incomes. CCCs prepare more than 1.8 million students to transfer to four-year institutions or to obtain training and employment skills.
Allocates $476 million to provide a higher COLA for the community colleges funding formula and other programs.
This includes$439 million to provide a 4.31% COLA for the Student Centered Funding Formula. This updated estimate includes a statutorily required COLA of 2.87% and a 1.44% discretionary increase. This discretionary increase is intended to provide the resources needed to satisfy the requirement to provide employees with 14 weeks of paid pregnancy disability leave. The May Revision also provides a higher COLA (2.87%) for other categorical programs.
Slightly increases funding for enrollment growth.
The revised budget provides $89.2 million for enrollment growth.This includes $33.9 million for a 0.5% growth in 2026-27 and an additional $55.3 million for a 1% growth in 2025-26.
Includes additional one-time investments.
The governor’s revised plan includes an additional investment of $9.7 million for the Adult Learner Demonstration Project, which “services to assist low-income adult workers move into stable and higher-paying jobs.” Additionally, the May Revision includes a modest increase of $607,000 for a flexible block grant, bringing the total to $100.6 million.
The budget also maintains other one-time and ongoing investments from the January budget proposal. That includes $38.1 million to increase funding for Calbright College, California’s online community college and $78 million to further expand a common cloud data platform and continue implementation of credit for prior learning efforts as part of the Master Plan for Career Education.
Justice System
Budget Projects Drop in Prison Population, Fails to Propose Prison Closures
Roughly 89,500 adults convicted of a felony offense are serving their sentences at the state level, down from a peak of 173,600 in 2007. This sizable drop in incarceration is largely due to a series of justice system reforms adopted by state policymakers and the voters since the late 2000s, including Proposition 47, which California voters passed in 2014. (See Prop. 47 investments section.)
Despite this substantial progress in reducing incarceration, American Indian, Black, and Latinx Californians are disproportionately represented in state prisons — a disparity that reflects racist practices in the justice system as well as the social and economic disadvantages that communities of color continue to face due to historical and ongoing discrimination and exclusion.
Among all incarcerated adults, most — around 86,400 — are housed in state prisons designed to hold roughly 71,100 people. This overcrowding equals about 122% of the prison system’s “design capacity,” which is below the prison population cap — 137.5% of design capacity — established by a 2009 federal court order. California also houses around 3,200 people in facilities that are not subject to the cap, including fire camps, community-based facilities that provide rehabilitative services, and Department of State Hospitals facilities.
Provides $14.2 billion General Fund for the California Department of Corrections and Rehabilitation (CDCR) in 2026-27, up from $13.8 billion as proposed in January.
Under the governor’s revised budget, CDCR’s share of overall state General Fund spending would drop below 6% in 2026-27. By comparison, CDCR’s budget comprised more than 9% of General Fund spending in 2013-14, the fiscal year before voters passed Prop. 47. (See Prop. 47 investments section.)
Projects that the prison population will decline in the coming years.
The average daily number of adults incarcerated in state prisons is projected to decline to around 87,600 in 2026-27. By June 30, 2030, the number of incarcerated adults is projected to fall further to about 85,210. This decline provides state leaders with an opportunity to close additional prisons in the coming years.
Fails to advance a plan to continue downsizing the state prison system.
In recent years, California has closed (or is in the process of closing) four state prisons, deactivated 42 housing units across 11 prisons, deactivated facilities in multiple prisons, and eliminated in-state and out-of-state contracted prison capacity. CDCR estimates that all of these changes combined will result in cumulative state savings of $4.9 billion by 2027-28. Further scaling back the state prison system would free up additional state revenue that could help incarcerated individuals successfully transition back to their communities as well as support crime survivors, reduce poverty, increase housing stability, and address substance use and mental health issues.
Revised Budget Includes No New Funding to Address Proposition 36’s Unfunded Mandate
In 2024, voters approved Proposition 36, increasing penalties for certain drug and theft offenses. For example, Prop. 36 reversed some of the sentencing reforms put in place by Prop. 47 of 2014. In addition, Prop. 36 established a new process allowing prosecutors to charge people with a “treatment-mandated felony” for possessing illegal drugs. Yet, even with Prop. 36, most of the justice system reforms adopted by state policymakers and voters over the past couple of decades remain in effect.
By increasing punishment for drug and theft crimes, Prop. 36 has created new costs — including for incarceration, probation, and the courts — at the state and local levels. However, Prop. 36 amounts to a huge unfunded mandate that leaves state and local policymakers holding the bag. The measure provided no new revenue to pay for these additional state and local costs — even though Californians were promised that Prop. 36 would provide evidence-based treatment, housing solutions, and programs to increase community health and safety. Instead, Prop. 36 assumes that state and local officials can accommodate the measure’s costs in their already strained budgets.
As a result, state and local leaders have to decide how to pay for the unfunded costs created by Prop. 36 even as they struggle to close budget deficits for the upcoming fiscal year and beyond.
The governor’s revised budget:
Does not provide new funds to help address Prop. 36’s unfunded costs at the state or local levels. Instead, the governor suggests that some of the savings generated by Prop. 47 could be used to pay for Prop. 36 court-ordered treatment programs (see Prop. 47 investments section). This approach — shifting Prop. 47 dollars to pay for Prop. 36 programs — would displace important mental health and substance use services that otherwise would be funded through Prop. 47.
May Revision Projects Decline in Proposition 47 Savings in Coming Years
Passed by voters in 2014, Proposition 47 reduced penalties for six nonviolent drug and property crimes from felonies to misdemeanors. As a result, state prison generally has not been a sentencing option for these crimes. Instead, people convicted of a Prop. 47 offense have served their sentence in county jail and/or received probation.
However, with the passage of Prop. 36 in November 2024, some of Prop. 47’s sentencing reforms have been reversed. Key changes enacted by Prop. 36 as well as their potential impact are described at the end of this section.
How Prop. 47 Savings Are Determined and Allocated
By decreasing state-level incarceration beginning in 2014, Prop. 47 reduced the cost of the prison system relative to the expected cost if Prop. 47 had not been approved by voters. The state Department of Finance is required to annually calculate these state savings, which are deposited into the Safe Neighborhoods and Schools Fund and used as follows:
65% for behavioral health services — which includes mental health services and substance use treatment — as well as diversion programs for individuals who have been arrested, charged, or convicted of crimes. These funds are distributed as competitive grants administered by the Board of State and Community Corrections.
25% for K-12 school programs to support vulnerable youth. These funds are distributed as competitive grants administered by the California Department of Education.
10% to trauma recovery services for crime victims. These funds are distributed as competitive grants administered by the California Victim Compensation Board.
California Has Allocated $908 Million in Prop. 47 Funds Through 2025-26
From 2016-17 through the current fiscal year (2025-26), California has allocated $908 million in state prison savings attributable to Prop. 47. These funds have been invested in local programs that support healing and keep communities safe.
For example, research has found that people who received Prop. 47-funded behavioral health services and/or participated in diversion programs were much less likely to be convicted of a new crime. Individuals enrolled in these programs had a recidivism rate of just 15.3% — two to three times lower than is typical for people who serve prison sentences (recidivism rates range from 35% to 45% for these individuals).
May Revision Estimates $89 Million in Prop. 47 Savings to Invest in Local Communities in 2026-27
The budget estimates $89.1 million in Prop. 47 savings due to reduced state-level incarceration — dollars that will be invested in local communities starting in 2026-27. (These savings are attributable to the 2025-26 fiscal year, but will become available for expenditure in 2026-27.) With these additional funds, Prop. 47’s total investment in California’s communities will reach almost $1 billion, up from the current $908 million (through 2025-26).
Prop. 47 Savings Will Decline Due to Prop. 36
With the passage of Prop. 36 in November 2024, voters increased penalties for certain drug and theft offenses, including by reversing some of Prop. 47’s sentencing reforms (see Prop. 36 Impacts section). For example, Prop. 36 allows simple drug possession, petty theft, and shoplifting to be charged as felonies in certain circumstances. Under Prop. 47’s rules, these crimes were generally misdemeanors.
The administration estimates that the longer sentences allowed by Prop. 36 will increase the prison population by 592 in 2025-26 and by about 1,550 upon full implementation. (The overall prison population is projected to continue to decline due to the offsetting impact of justice system reforms that remain in effect.) At the same time, the annual savings from Prop. 47 is expected to drop substantially, falling from $91.5 million in 2025-26 to $89.1 million in 2026-27 to $77.3 million in 2027-28 — a nearly 16% decline over this period. Prop. 36 is a key contributor to this sizable drop.
In short, because of Prop. 36, tens of millions of dollars that would otherwise have supported behavioral health treatment and other critical services over the coming years is expected to be shifted back to the state prison system.
Revised Budget Includes One-Time Funds to Address Crime and Support Survivors
The May Revision includes several one-time General Fund investments to support victims of crime, including:
$25 million to backfill declining federal support for crime survivors. Federal funds provided through the Victims of Crime Act (VOCA) help to support critical services like counseling, emergency shelter, and financial assistance for crime survivors, including survivors of domestic and sexual violence. Declining federal VOCA funding has reduced support for organizations that provide these services. The governor’s proposed one-time funding would “significantly alleviate” the service reductions that “would otherwise be necessary,” according to budget documents.
$10 million to combat human trafficking. These funds would be competitively awarded through a “vertical prosecution” grant program aimed at preventing human trafficking. In a vertical prosecution, a single prosecutor handles the case from the outset. This provides several benefits, including the opportunity for the prosecutor to establish rapport with the victims and better understand the details of the case.
$10 million to help solve cases involving missing and murdered indigenous people (MMIP). These funds would be awarded on a competitive basis to federally recognized Indian tribes to support efforts to publicize, investigate, and solve MMIP cases. The state has provided $37 million to support MMIP grants in recent years.
Other Key Issues
Governor Hints at Coming Effort to Protect Elections Against Federal Threats
Election threats are also coming from within California: The Riverside County Sheriff recently confiscated and attempted to recount 650,000 ballots citing baseless claims of voter fraud pushed by conspiracy theorists.
Countering these threats and protecting Californians’ right to vote requires a range of responses, including new state investments. The state typically provides only a small amount of funding to support elections, which are overseen by California’s 58 counties. (The state does pay most or all of the cost of one-off elections, such as a gubernatorial recall, but those are rare.) Instead, counties and other local governments cover most typical election expenses using property taxes and other locally generated revenues. In other words, even though the state reaps substantial benefits from county oversight of elections, it fails to pay its fair share of those costs.
The 2026 midterms won’t be a “business as usual” election, so state funding should not be stuck in the past. This year, additional state funds are needed to support:
Outreach and education to encourage Californians to vote early,
Expanded access to vote centers and ballot boxes,
Expedited ballot processing,
Statewide law enforcement coordination to protect against election interference, including attempts by rogue county sheriffs to seize ballot boxes, and
Cybersecurity, election monitoring, and post-election litigation.
While the May Revision does not include additional state funding for elections, it does indicate that the governor and legislative leaders will — through the budget process — “identify ways to continue to protect democracy” in California. This suggests that in the coming weeks, state leaders will unveil new funding commitments and other changes that aim to defend against election interference, support county election administration, and protect Californians’ right to vote.
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.
17
Office of Governor Gavin Newsom, press release (September 30, 2024).
18
California Government Code, Section 16418.7.
19
Amendments can be placed on a statewide ballot through a citizens initiative or by the Legislature.
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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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