Artificial intelligence, state budget shortfalls, shifts in California’s leadership, and affordability will be among key issues on the legislative agenda in 2026, shaping the state’s approach on policy and influencing politics during a pivotal election year.

Lucas Public Affairs (LPA) recently hosted a conversation with three veteran legislative professionals –  María Spencer Neider of Platinum Advisors, Nick Hardeman of Hardeman Strategies and Consulting and California State Senate Budget Director Chris Woods – who shared their thoughts with LPA staff and leadership regarding what to expect this year.

Four key takeaways emerged:

• Artificial Intelligence: AI will continue to be a powerful economic engine for the state, but also could impact energy and water resources and is being scrutinized for its potential threat to privacy, children’s safety and information integrity. Legislators are likely to focus on regulating AI while safeguarding the industry’s foothold in California, especially given AI and tech’s ties to the state’s economy.
• State Budget: A stark budget outlook for the next fiscal year – and outlying years – will likely mean lawmakers will need to continue to tighten belts and reduce expenditures. The challenging economic outlook also could force legislators and the Governor to look at other ways to increase revenues, including potential tax increases, which may prove difficult in an election year.
• Leadership: As California gears up for an election year, so too is Governor Gavin Newsom, who is maximizing his policy and political reach in his final year of leading the Golden State. At the same time, the state also has a new Senate leader in Senate President pro Tempore Monique Limón, who is re-energizing the upper house.
• Affordability: The rising cost of living and affordability will continue to be a pervasive issue that underscores many legislative discussions and policy this cycle. In addition to kitchen-table issues like electricity rates and insurance costs, two issue areas where the affordability argument is cropping up routinely are within discussions about healthcare and housing.

Tech Talk

Revenues from AI investments and income tax withholdings in California helped offset a projected $18 billion budget shortfall, cutting it to $3 billion. But with California’s AI juggernaut comes economic and social costs that will likely require the Legislature to enact guardrails for the industry without driving it out of state. This year, that could include addressing privacy and safety concerns around data scraping, AI decision-making, child protection and use of personal data to train AI models. Additional concerns also continue to emerge around the impacts to energy and water resources needed to run AI hardware and processing. Meanwhile, Governor Newsom, a staunch advocate of the state’s leadership in technology and innovation, is pushing hard for the development of quantum and fusion technologies in California.

Budget and Belt Tightening

While AI investment and tax revenues bolstered the state’s economy and helped offset the deficit for the 2026-27 fiscal year, spending cuts and potential tax increases may need to be considered to close the remaining gap. Legislators want to address the long-term budget problem, but don’t want to harm their constituents in the process, especially at a time when federally funded programs are also being cut. Compounding pressures is the fact that many in the Legislature – half of the Senate and all of the Assembly – are facing an election year. The best that can be expected is that the Legislature will make progress in reducing the deficit, maintaining resources and programs for Californians in need, and not make decisions that could exacerbate the problem. A November ballot initiative to permanently extend Proposition 55, which extended Proposition 30 and raised the state sales tax and income taxes for high-income earners to pay for education and public services, is thought to be likely.

Leadership and Legacy

California will elect a new governor in November, an election that could significantly impact the continuation of Newsom’s ambitious agenda and implementation of major initiatives in housing, healthcare, education, clean energy, and technology during his tenure. While Newsom is unlikely to step out of the spotlight anytime soon, budget constraints and increased pressures surrounding affordability may complicate the push-and-pull of Legislature and Horseshoe dynamics.

Santa Barbara Democrat Monique Limón, who took the helm as Senate leader in November 2025 and was formally sworn in as Senate President Pro Tempore earlier this month, is generating excitement among legislators and staff as she kicks off her tenure leading the upper house. The first Latina and mother to serve in the role, Limón is also notable for her no-nonsense approach to legislation, concerns for the needs of working parents and her nine years of experience in the Legislature.

Affordability All Around

Affordability will continue to be a major focal point this legislative year, the second of the two-year cycle that ends August 31. Two top-tier issues connected to affordability discussions will be housing and healthcare, with electricity rates and insurance costs continuing to dominate Capitol conversations.

Although California has worked hard to reduce barriers to building affordable housing, construction of new, more affordable homes remainshampered by environmental regulations, shortages of skilled labor and tariffs on critical construction supplies. California remains a desirable place to live, which increases housing demand and pushes prices higher. Innovative ways to address these challenges will be crucial, with one recent example being the California Dream for All Program, which has been helping first-time homebuyers with down payment loans since 2023 and reopens for applications in February.

California’s investments in healthcare, including major expansions of Medi-Cal, is also impacting the state’s budget deficit and forced the state to pause many of the advances, including freezing enrollment for undocumented immigrants. Combined with the expiration of federal Affordable Care Act subsidies, millions of Californians are expected to lose health coverage or experience higher health care costs.