A Revenue Bump Doesn’t Change the Bigger Budget Picture

By Tom Sheehy

Last month, I joined Assemblyman Josh Hoover on The Point of Order podcast to discuss Gov. Gavin Newsom’s proposed budget and California’s fiscal outlook. That conversation focused on a familiar theme: how volatile state revenues can be, and why short-term gains should not be confused with long-term fiscal stability.

Recent revenue updates from the Legislative Analyst’s Office have understandably reignited that discussion. The LAO now estimates that near-term General Fund revenues could be roughly $5 billion higher across the current budget window than projected in the governor’s January budget.

That is meaningful news — and it is also a reminder of how quickly California’s revenue picture can change.

To be clear, this update does not invalidate concerns about the state’s underlying budget condition. It reinforces a distinction that often gets lost in budget debates: the difference between short-term revenue performance and long-term fiscal health.

Even the LAO is explicit that any near-term revenue gain should be viewed as a one-time windfall, not a permanent fix. Under California’s constitutional formulas, a significant share of additional revenue is automatically directed to K-14 education and reserves. As a result, a $5 billion revenue improvement does not translate into $5 billion of new discretionary spending. The LAO estimates it would reduce near-term deficits by closer to $2.5 billion.

More importantly, the structural challenges facing the budget remain unchanged.

State spending pressures continue to grow faster than ongoing revenues. Federal support is declining. Multiyear commitments made during prior surplus years are still built into the budget outlook. None of those dynamics disappear simply because revenues come in stronger than expected for a few months.

There is also broad agreement — including from the LAO — that the risk of a revenue downturn in the next year or two is real. California’s tax base remains heavily dependent on high-income earners and capital gains, making revenues especially sensitive to financial markets and investment cycles. Neither administration nor LAO forecasts fully account for the possibility of a sharp correction tied to artificial intelligence–related investment or broader market volatility.

In addition, reports of increased tax planning, income shielding and taxpayer migration raise legitimate questions about the durability of future revenue growth. Proposed tax changes, regardless of intent, can alter behavior in ways that are difficult to model but significant over time.

None of this is to dismiss the value of updated revenue data. Budget forecasting requires humility, and responsible analysis means adjusting as new information becomes available. If revenues continue to outperform expectations, the May Revision will reflect that.

But a stronger May Revision does not eliminate the need for caution. One-time money should be treated as one-time money. Using temporary gains to expand ongoing programs only increases the risk of deeper cuts when the next downturn arrives — a lesson California has learned repeatedly.

As the budget process moves forward, the real question is not whether a single forecast goes up or down, but whether budget decisions align with the long-term realities of California’s economy, revenue structure and spending obligations.

That question matters far more than any single data point — and it will still matter long after this budget cycle concludes.