California Gov. Gavin Newsom listens to community leaders speak during a press conference at Controlled Thermal Resources "Hell's Kitchen" geothermal and lithium drill site in Calipatria, Calif., on Monday, March 20, 2023. Governor Newsom Tours Lithium Valley 5638
Sacramento, California – California Gov. Gavin Newsom’s administration is projecting a $16 billion revenue shortfall in the upcoming fiscal year, a deficit largely attributed to President Donald Trump’s sweeping tariff policies. The new economic strain threatens to destabilize the state’s budget and derail ongoing negotiations in Sacramento.
The updated forecast, set to be unveiled Wednesday as part of Newsom’s revised budget proposal, marks a stark reversal from earlier this year, when the state appeared to be on track for a balanced budget. Officials now estimate California will face at least a $10 billion deficit, fueled by a 4 percent drop in projected revenue due to economic disruptions caused by volatile federal trade policy.
“The Trump administration’s tariff policies weakened the U.S. and California’s economic outlook and led to a decrease in the stock market in April 2025,” the internal memo reads. “These factors had a direct negative impact on California tax revenues beginning in 2025 and reversed the positive cash trends seen to date.”
The state’s revenue decline is primarily tied to a $10 billion loss in capital gains tax collections, alongside $2 billion in lower wages and withholdings, and $2.5 billion in diminished corporate tax revenue. California’s progressive tax structure, which relies heavily on stock market gains, has made it especially vulnerable to national economic shocks.
While Trump and Chinese officials have temporarily de-escalated their trade dispute, the damage to consumer confidence and financial markets has already been done. The state’s ports, crucial to California’s economy, have seen declining traffic, and economic anxiety continues to ripple through industries.
In response, California Attorney General Rob Bonta announced Tuesday the state will seek a preliminary injunction to block the new tariffs. Filed in federal court last month, the lawsuit argues that Trump lacks the legal authority under the International Emergency Economic Powers Act to impose the sweeping tariffs introduced on April 2.
“California is set to experience an outsized share of losses due to our larger economy, workforce, and exposure to trade,” Bonta said. “We are pulling out all the stops and will today ask the court to immediately halt these illegal tariffs while California argues its case.”
A hearing is scheduled for next week in San Francisco, with a possible ruling on the injunction by mid-June.
Gov. Newsom echoed the urgency of the legal battle: “President Trump has overstepped his authority, and now families, businesses, and our ports are literally paying the price.”
With the June budget deadline looming, state lawmakers and lobbyists are bracing for difficult decisions ahead. The legal and financial showdown could have far-reaching implications not just for California, but for the broader national debate over trade and executive power.
