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(Bloomberg) -- California Governor Gavin Newsom unveiled a budget proposal that aims to close a $12 billion deficit, marking the third consecutive fiscal year in which state lawmakers need to plug significant shortfalls.

Newsom, a second-term Democrat, said that a projected $363 million discretionary surplus for the upcoming fiscal year has morphed into a deficit in the months since his office unveiled his January budget proposal as new federal trade policies under President Donald Trump have dampened California’s revenue projections and its economic outlook.

The swelling deficit is largely the result of uncertainty created by Trump’s tariffs — which have prompted economists to scale back their forecasts for GDP growth worldwide — along with rising costs. Newsom’s office said that the trade war ignited by new US tariffs has raised unemployment and inflation projections for California, though trade tensions have eased a bit after China and the US agreed to temporarily lower tariffs on each other’s products for three months so Washington and Beijing can negotiate a broader agreement.

Additionally, California’s progressive tax system is sensitive to swings in the stock market and recent volatility has hampered the revenue stream. The top 1% of California earners pay nearly half of the state’s personal income-tax collections.

“The economy of California was humming,” Newsom said at press conference in Sacramento. “That has significantly changed since the actions of this administration.”

“It’s best to describe this as a Trump slump,” he said.

The governor’s updated $322 billion spending plan released Wednesday — based on the latest revenue figures in what is known as the May Revision – includes $226 billion in general fund spending. That’s about $15 billion more than the current year, funded partly by rainy-day reserves. The budget shortfall for the next fiscal year represents about 5.8% of general fund spending.

In an effort to control spending, Newsom earlier released a proposal to end free health care for most undocumented immigrants by introducing monthly Medi-Cal premiums and freeze new enrollment. This marks a major reversal of his signature policy that made California the first state to offer full Medicaid coverage to all income-eligible residents regardless of immigration status.

“We believe that people should have some skin in the game,” Newsom said referring to the new premiums.

California’s budget outlook is further clouded by a tax deadline delay implemented following January’s Los Angeles wildfires, which obscured revenue trends. The full cost of the disaster still remains uncertain, with recovery efforts hinging on pending decisions by state lawmakers and federal officials over cost-sharing and aid.

California’s revised budget plan includes cost-cutting measures totaling $5 billion in 2025-26, projected to reach $14.8 billion by 2028-29. Major reductions target additional changes to the state’s Medi-Cal program, including an elimination of long-term care benefits for certain individuals, and reinstating premiums and asset test limits. Cuts also extend to reduced support for specialty drug coverage for weight-loss drugs and in-home care services.

To further address the deficit, the budget outlines $5.3 billion in revenue and borrowing strategies for 2025-26, such as deferring repayments on existing loans and tapping into special funds like those from labor and unfair competition settlements. Additionally, $1.7 billion in fund shifts are proposed. The budget also includes conditional future spending commitments totaling $456.1 million starting in 2027-28, with targeted investments in food assistance and foster care reform.

The budget proposal maintains its planned withdrawal of $7.1 billion from reserves.

Notably absent from the latest budget proposal is a state-funded bailout for Los Angeles. At the request of Mayor Karen Bass, lawmakers asked for $638 million of state funds in March to help Los Angeles safeguard essential services and cover rising liability costs. The city is facing a nearly $1 billion deficit for the next fiscal year as it looks to rebuild after the fires.

The deficit for next fiscal year would have been higher. However, last year’s budget plan outlined $28 billion in solutions for the 2025–26 budget, including $12 billion in spending cuts, $16 billion from other sources like temporary tax increases and a $7 billion withdrawal from the state’s rainy day fund.