California just pulled in $11 billion in extra tax revenue after a sharp jump in AI‑linked tech stocks pushed capital‑gains income way above forecasts.
State officials said the bump is big, but it does nothing to stop the deficit from rising toward $18 billion in the next fiscal year. The money came in while job growth stayed weak and consumer spending barely moved.
The Legislative Analyst’s Office said the surge in stock gains for wealthy residents lifted the state’s general‑fund revenue far above earlier estimates, but most of that cash gets swallowed fast by school funding rules and required reserve deposits.
Gabriel Petek, the state’s Legislative Analyst, told reporters the situation is shaky. He said, “Quite frankly, the budget condition right now has become relatively weak.”
The LAO pointed to how the AI rally turned into a tax windfall at the same time other parts of the economy slowed.
Tech compensation for high‑income workers played a major role last year, with stock‑based pay at four large tech firms making up almost 10% of total income‑tax withholding in the first half of 2023.
Track tech‑driven gains and rising risks
A measure of the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) is up about 19% this year, ahead of the S&P 500’s 13% gain. Nvidia will report earnings after the close today, and that matters because the stock has almost single‑handedly shaped this year’s tech trade.
Nvidia now carries the biggest weight in the S&P 500. Its shares fell nearly 13% since the October 29 peak as traders rethink how fast companies will keep pouring money into chips and data centers.
The LAO said the state’s reliance on its richest households leaves California exposed to big swings. The top 1% pay nearly half of personal income‑tax collections.
Petek said he is worried the AI stock surge is being driven more by investor hype than solid economic activity. The LAO’s report included a warning: “With so much exuberance surrounding AI, it now appears time to take seriously the notion that the stock market has become overheated.”
The office added that markets tend to overreact to major tech shifts even when those technologies are real and important.
The strong tax receipts contrast with what the LAO calls softer economic signals. California has been losing tech jobs as automation speeds up, and unemployment spells last longer.
Consumer activity is flat. Investors also turned more cautious about AI spending, making Nvidia’s results even more important for the rest of this year.
Detail budget stress and federal policy impact
The LAO said the state will likely face repeated deficits, with the shortfall projected to grow toward $35 billion a year by 2027‑28.
Roughly $10 billion of the new revenue will be eaten up by constitutional spending rules tied to schools and required deposits into reserves. The LAO also flagged uncertainty tied to a new multitrillion‑dollar tax and spending law that passed in July to support President Donald Trump’s policy agenda.
The law will affect health care coverage, food aid, higher‑education funding, and some personal and corporate tax rules. Most of those changes do not start until 2026 or later, so they do not change the near‑term budget outlook much.
Petek said California has already burned through most of its short‑term options. The state used one‑off spending cuts, borrowed against several programs, and drained reserves. Those reserves now sit at about half of their earlier peak.
The LAO said the state is “undeniably less prepared” for a downturn than before. Petek added that the budget has weakened even though the economy avoided a recession and stocks climbed, showing the problem is structural.
The office urged lawmakers to use ongoing spending cuts and steady revenue increases to fix the long‑term imbalance.
The numbers follow Governor Gavin Newsom’s approval of a $321 billion budget in June for the current fiscal year. That plan closed a $12 billion deficit.
To close the projected $18 billion deficit for 2026‑27, Petek said revenue this year would need to beat expectations by more than $30 billion because school‑funding and reserve requirements absorb so much of the incoming cash.
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