The top artificial intelligence and tech companies in California may be swimming in cash for now, but as skepticism grows over whether this current AI boom will continue or bust, so do concerns over the state’s budget and its reliance on the AI industry.
As CalMatters’ Levi Sumagaysay explains, California’s biggest source of revenue is personal income tax. In addition to base wages, many tech companies pay employees in stock options, which when fully vested and owned by employees are treated like ordinary income for tax purposes. Companies pay withholding taxes on some of that income to the state and U.S. governments.
The revenue paid from these taxes by some of the state’s biggest tech companies is expected to make up about 10% of all income tax withholding this year, according to the nonpartisan Legislative Analyst’s Office. As California faces a projected $18 billion deficit this year (more on that below), the state’s financial outlook is partly tied to these AI companies.
- Chas Alamo, LAO’s principal fiscal and policy analyst: “We’re seeing a real boost to income-tax receipts because of this — for a relatively small number of employees. If the AI market were to deteriorate, we could see these withholdings decline.”
That’s because other aspects of California’s economy, such as job growth and wages, remain stagnant or are declining: In September California’s unemployment rate rose to the highest in the country, and from 2024 to 2025, the number of Bay Area tech jobs decreased. Some tech companies, such as San Francisco-based Salesforce, cite AI as a reason why they must layoff employees.
- Jeff Bellisario, executive director of the think tank Bay Area Council Economic Institute: “Tech booms in the past have led to an employment boom. This doesn’t feel like that.”
CalMatters events: On Feb. 5 CalMatters’ Adriana Heldiz will host a panel to discuss trauma-informed care: How it can shape the future of education, what it takes to sustain it and how policymakers can support more programs like it statewide. Register here to attend in person in Chula Vista or virtually.
Other Stories You Should Know
Coming soon: The last Newsom budget
Speaking of the state budget, Gov. Gavin Newsom on Friday will unveil his preliminary spending plan for 2026-27 — his last as California’s governor. With an $18 billion deficit projected for the fiscal year, how Newsom plans to handle the deficit could have notable implications for his expected presidential bid, writes CalMatters’ Yue Stella Yu.
The deficit is a result of the state’s escalating spending, federal funding cuts and rising economic insecurity under President Donald Trump. State Republicans and other Newsom critics also blame the deficit on Newsom’s mismanagement.
To close the gap, state leaders could walk back some of last year’s funding commitments. Medi-Cal is also California’s most expensive program, though Newsom has not indicated whether he’ll target it for cuts. But as a lame-duck governor eyeing the presidency, Newsom would be even less inclined to enact major policy changes to address the state’s long-term budget issues, political strategists say.
- Garry South, longtime Democratic consultant: “It’s not an uncommon occurrence in California for a departing governor to leave a note on the new governor’s desk that they’ve got a budget deficit.”
Most Altadena residents still displaced, still awaiting utility settlements
Utility company Southern California Edison has paid out just 82 victims of the Eaton Fire through its wildfire recovery compensation program, despite drawing in nearly 1,800 customers into the program, writes CalMatters’ Malena Carollo.
A year ago, the deadly wildfire killed 19 people and destroyed over 9,000 structures in Los Angeles County. About 80% of Altadena residents are estimated to still be displaced as of October. Though an official cause has yet to be determined, federal prosecutors cite faulty Edison equipment for the fire.
To settle numerous lawsuits against the company, Edison launched a compensation program two months ago. Survivors have criticized the program for excluding some residents, underpaying others and requiring participants to waive their right to sue the company.
Edison offered a total of $34.4 million to settle the 82 claims, with half of the claims for total losses, and the others related to smoke and ash damage.
And lastly: The battle over federal homelessness funds
The Trump administration is attempting to drastically cut the amount of federal funds that can be spent on permanent housing for homeless individuals. CalMatters’ Marisa Kendall and video strategy director Robert Meeks have a video segment on why advocates say this move could force people out of housing, as part of our partnership with PBS SoCal. Watch it here.
SoCalMatters airs at 5:58 p.m. weekdays on PBS SoCal.
California Voices
CalMatters columnist Dan Walters: As Newsom kicks off his last year as governor, California’s intractable issues not only serve as a potential drag on his presidential campaign, but they also color the campaigns of his would-be successors.
The attention brought to incarcerated firefighters during last year’s L.A.-area wildfires showed that people want to see second chances given to incarcerated people working to turn their lives around, writes Jose Angel Amezcua, a formerly incarcerated firefighter from Salinas.
Other things worth your time:
Hundreds of judges reject Trump’s mandatory detention policy, with no end in sight // Politico
ICE is using facial-recognition technology to quickly arrest people // The Wall Street Journal
AI regulation battle looms in CA despite Trump threats // Bloomberg
Five decisions that will reshape CA’s relationship with Trump in 2026 // San Francisco Chronicle
Providers brace for Medi-Cal cuts: ‘We may not be able to serve everybody’ // The San Diego Union-Tribune
CA teachers have a right to tell parents if their child might be LGBTQ+, federal judge rules // Los Angeles Times
Social workers still reeling in aftermath of SF’s Ward 86 stabbing // KQED
Six stories of loss and resilience, a year after the LA fires // LAist