An additional $420 million in tax breaks for Hollywood movie studios. $25 million for legal battle against President-elect Donald Trump. Unexpected costs of providing health care to the elderly and undocumented immigrants.

Gov. Gavin Newsom’s wish list and other new costs threaten to undo progress toward balancing the state’s budget as analysts warn of the need for California to rein in spending.

To solve a $78.5 billion budget deficit over the past two years, Democratic governors and lawmakers have taken savings from the state’s rainy day fund, delayed programs, cut spending and occasionally resorted to accounting tricks. . These developments, combined with higher-than-expected tax revenues in recent months, suggest the state could face a relatively modest $2 billion shortfall next year.

But billions of dollars in federal funding could be lost amid proposals announced by Newsom in recent months, cost overruns on existing programs and analysts predicting deeper budget problems in the coming years. Therefore, the deficit is likely to widen further.

Rep. Jesse Gabriel (D-Encino), who chairs the budget committee, said, “There are many reasons why we should be cautious and cautious going forward, and we should be very clear about the tough choices that lie ahead.” .

Gabriel said the Legislature will “carefully consider and scrutinize” the governor’s proposal, and that lawmakers will consider it more closely when Newsom releases his budget proposal in January.

Newsom’s new spending proposals

With Hollywood in the grips of a major production downturn, Newsom recently proposed a “historic expansion” of a California program that gives tax breaks to studios that make movies and TV shows. The program currently provides $330 million in credits annually, but the governor wants to more than double that to $750 million next year.

With this boost, California would become the most movie-friendly state in the country. The tax credits are scheduled to become refundable for the first time in the next budget year, which begins July 1, meaning the state will pay businesses in cash for credits that exceed their tax liability.

The governor said the expansion will help keep more projects in the state and boost economic activity as Hollywood studios struggle to recover from losses and strikes caused by the pandemic.

The film tax credit is popular among lawmakers in Los Angeles, where the majority of the film industry’s 125,000 employees are based. But the credits could face opposition from education advocacy groups because they would lead to cuts in school funding.

Chris Horn, executive director of the California Budget and Policy Center, said the state loses more than $70 billion a year in tax credits and deductions. He said giving more tax credits to compete with other states “will just be a race to the bottom.”

“When one state raises the credit, every other state feels like they have to do it too, and soon every state is basically handing out free cash to movie companies,” Hoene said. . “So it’s a losing battle in the long run.”

The governor’s litigation fund against the incoming Trump administration is also new spending that was not accounted for in the Legislative Analysis Service’s $2 billion deficit projection in late November.

Anticipating more legal authority will be needed under the Trump administration, the governor is asking lawmakers to approve an additional $25 million to fight the case with the federal government.

Although the amount is relatively small, the governor’s office says there is potential for significant profits. The state spent $42 million filing 122 lawsuits against the Trump administration from 2017 to 2021, according to the governor’s office. In the only case in which the federal government tried to tie police funding to immigration enforcement, the state won and the money was refunded. $57 million.

As California expands eligibility to all income-eligible adults, regardless of immigration status, and the number of seniors seeking services increases, California’s health care program for low-income residents also has a larger-than-expected impact. It’s expensive.

As of November, Parliamentary financial advisers reported The program will cost the state $2.7 billion more than budgeted for this year and $1.2 billion more than expected for next year.

After a news conference Tuesday at a rice farm in Colusa, Newsom said he would continue to deliver on his promise to provide security for immigrants when he unveils his spending plan for the coming year in January.

“We’re going to be talking across a variety of issues as they relate to the coming years,” Newsom said. “I can name seven or eight budget categories that you have to think through, and this is one of them.”

Newsom said President Trump’s threat to deport immigrants could also impact the cost of Medi-Cal services. The governor said he recently met a young immigrant woman who stopped her chemotherapy treatment for fear of being deported.

“This is the new reality of the world, and Mr. Trump hasn’t even been sworn in yet. That’s why she was afraid to seek treatment,” Newsom said. “So I think that will impact a lot of these programs as well.”

The governor did not provide details on the amount of cuts he proposes to cover new proposals and other unanticipated policy costs.

“I will submit my budget on January 10th. That way it will be balanced and we will be able to answer those questions,” he said of his budget.

How voters and lawmakers add to state costs

Newsom’s proposal isn’t the only one hurting the state budget. Voters also want more spending.

In November, voters approved Proposition 35, adopting a permanent tax on managed care organizations. California uses the tax to extract more federal funds for Medi-Cal, the state’s health care program for low-income residents.

Proposition 35 effectively requires that a portion of the funds be allocated to providers who serve Medi-Cal patients. The California Department of Treasury estimates the measure will cost the state $4.9 billion in funding it was scheduled to use in 2025-2026.

The other measure passed by voters, Proposition 36, is estimated to potentially cost the state up to hundreds of millions of dollars each year. Requiring harsher penalties for some theft and drug crimes is expected to increase spending on prisons and jails.

Voters also approved two bond measures on the November ballot that would collectively borrow $20 billion and repay them with interest. Proposition 2 to improve school buildings and Proposition 4 to build environmental projects are expected to cost the state a total of $900 million annually.

Lawmakers’ priorities also put pressure on the budget. among them November reportthe Legislative Analyst’s Office said the “timing and magnitude of costs” associated with the health care worker pay increases approved last year remain uncertain, with estimates ranging from the low hundreds of millions of dollars to the low billions. He said that.

The Journalism Fund, which lawmakers and the governor agreed to support in August, will add $30 million to the state’s next year’s budget as part of a new public-private partnership with Google to research artificial intelligence and strengthen local journalism. will be spent. Google will match the state’s investment next year, with both sides expected to spend an additional $10 million each year for the next four years.

Impact of President Trump on state finances

On the campaign trail, Trump threatened to withhold federal wildfire funding if Newsom didn’t follow through on a plan to send water from Northern California to farmland in the South.

Although vague, this threat could have serious implications for California. Catastrophic wildfires in California can cause billions of dollars in damage, much of which is typically covered by the federal government.

Newsom said he is considering it. Deposit national funds into disaster account If President Trump denies federal aid. But it’s difficult for lawmakers and governors to budget for policy changes without knowing how much money they could end up losing.

President Trump also threatened to end federal consumer subsidies for clean cars.

Despite the state’s tight budget, Newsom announced in November that California would offer California-specific rebates to buyers of zero-emission vehicles if President Trump complied.

The governor did not quantify the amount of funds the state would have available for rebates, saying the money would come from the cap-and-trade program, the state’s market for pollution credits to reduce greenhouse gas emissions.

Horn noted that President Trump’s promise to expand tax cuts for businesses, approved during his first term, would take significant revenue from the federal budget. Threats to cut federal funding for social programs like health care and food assistance “could burn a big hole in the state budget,” he said.

To reduce California’s losses if that happens, Hohne said the state should consider raising taxes on corporations and wealthy individuals that receive federal tax breaks.

“I haven’t heard state leaders talking about it yet. I think that’s something that we have to start thinking seriously about if we really want to protect our state’s budget situation and our ability to provide services.” ”Hone said.

H.D. Palmer, a spokesperson for the California Department of Treasury, said that California’s economy has improved over the last year thanks to how Newsom and lawmakers have reduced the current budget deficit and adopted solutions to next year’s budget problems. He said he hopes to start 2025 in better conditions than before.

However, with the transition to the Trump administration, “known unknowns” remain in the national budget debate.

“We know there is a potential threat to future policy decisions, but we don’t yet know what shape or form that will take,” Palmer said. “And we don’t know what that price will be.”