California Loses Federal Funding: What It Means for Your Property Taxes in 2026

California just lost $10 billion in federal funding. And the state is staring down an $18 billion budget deficit.

The math is brutal. And someone has to pay for it.

State leaders are already floating new taxes, fee increases, and revenue measures to close the gap. For California homeowners, that means one thing: your taxes are going up.

Here's what's happening, how the state will likely raise revenue, and — most importantly — what you can do to make sure you're not overpaying on property taxes while Sacramento figures out its budget mess.

What Just Happened: $10 Billion in Federal Cuts

In January 2026, the Trump administration froze $10 billion in federal funding to five Democratic-led states: California, Colorado, Illinois, Minnesota, and New York.

California is the biggest target. The frozen funds come from three programs:

• $7.4 billion from Temporary Assistance for Needy Families (TANF) — cash assistance for low-income households
• $2.4 billion from the Child Care and Development Fund
• $870 million from the Social Services Block Grant

The administration cited “massive amounts of fraud” as justification. California officials pushed back, calling it politically motivated.

Regardless of who's right, the outcome is the same: California just lost billions in federal support — and the state has to replace it somehow.

The Budget Problem Was Already Bad

Even before the federal cuts, California was facing a budget crisis.

Governor Newsom's January 2026 budget proposal estimates a $2.9 billion deficit for the 2026-27 fiscal year. But the Legislative Analyst's Office (LAO) — California's nonpartisan budget watchdog — says the real number is closer to $18 billion.

The difference? Newsom's estimate assumes the stock market stays stable. The LAO's estimate assumes a market downturn, which is more realistic given current volatility.

And it gets worse. Starting in 2027-28, California faces $35 billion annual structural deficits — meaning the state spends $35 billion more per year than it brings in.

That's not a one-time problem. That's a permanent gap.

How California Will (Likely) Raise Revenue

When states face budget shortfalls, they have three options: cut spending, raise taxes, or borrow money.

California will probably do all three. But tax increases are already on the table. Here's what's being proposed:

1. Income Tax Increases on High Earners

The California Teachers Association is backing a ballot measure to make permanent a temporary income tax increase on high earners. The tax was first approved in 2012 and extended to 2030.

Making it permanent would generate $15 billion per year — all earmarked for K-12 schools and community colleges.

Who pays: Californians earning over $250,000 (single) or $500,000 (married).

2. Wealth Tax on Billionaires

The Service Employees International Union (SEIU) is proposing a one-time 5% tax on California billionaires. This would raise approximately $100 billion, spent at $25 billion per year to cover structural deficits and fund healthcare services.

Who pays: California's wealthiest residents (billionaires only).

The problem: Wealth taxes are notoriously difficult to implement and enforce. And they tend to drive high-net-worth residents out of state.

3. Sales Tax Increases

California already has some of the highest sales taxes in the nation (7.25% base rate, up to 10.75% with local add-ons). But sales tax is a reliable revenue source, and it's easy to raise.

Expect proposals for temporary sales tax increases — especially at the local level.

Who pays: Everyone. Sales taxes hit lower-income residents hardest.

4. Gas Tax and Vehicle Fees

California's gas tax is already one of the highest in the country at 57.9 cents per gallon. But gas tax revenue is declining as more Californians drive electric vehicles.

To replace that revenue, expect new or increased vehicle registration fees, EV charging taxes, or mileage-based fees.

Who pays: All drivers, but especially EV owners who currently avoid gas taxes.

5. Property Tax Reassessments (The Hidden Tax Increase)

Here's the one most California homeowners don't see coming: property tax increases through reassessments.

California's Proposition 13 caps annual property tax increases at 2% — but only on your assessed value, not your tax bill. And when counties reassess properties, they don't always get it right.

In fact, 30-60% of California properties are over-assessed.

Counties use mass appraisal systems — computer models that process thousands of properties at once. These systems make mistakes:

• Wrong square footage (often 50-200+ sq ft too high)
• Features you don't have (pool, garage, extra bedroom)
• Outdated comparable sales
• Condition issues not reflected in value
• Unequal appraisal — your home valued higher than similar properties

As California scrambles for revenue, don't expect counties to be conservative with assessments. If anything, assessors will lean toward higher values to capture more property tax revenue.

Thanks to Proposition 13's 2% cap, your assessed value can only increase 2% per year. But if you're starting from an inflated base, you're still overpaying — every single year.

Why Property Taxes Are the “Invisible” Revenue Source

Here's why property taxes are so attractive to cash-strapped governments:

1. They're automatic. You don't need to pass a new law or win a ballot measure. Counties just reassess values and send you a bill.

2. Most people don't challenge them. Only about 5% of California homeowners appeal their property assessments. That means 95% just pay whatever the county says they owe.

3. It's a stable revenue source. Property taxes don't fluctuate with the economy like income or sales taxes. Counties can count on them year after year.

4. Over-assessments are common and hard to spot. Unless you actively compare your assessed value to recent sales in your neighborhood, you won't know if you're overpaying.

Put simply: property tax over-assessments are the easiest way for local governments to raise revenue without raising rates.

What California Homeowners Should Do Right Now

You can't control what Sacramento does with income taxes or sales taxes. But you can control whether you're overpaying on property taxes.

Here's your action plan:

1. Check Your Property Assessment (Now)

California counties mail out property assessment notices between June and September. When yours arrives, don't ignore it.

Do this:

• Compare your assessed value to recent sales of similar homes in your neighborhood
• Check your county's property record for errors (square footage, lot size, features)
• Look for signs of unequal appraisal — is your home valued higher than similar properties nearby?

If your assessed value seems too high, you have the right to appeal.

2. Know Your Appeal Deadline (It's Short)

California appeal deadlines vary by county, but most fall between July and November.

You typically have 60 days from the date your notice is mailed to file an appeal. Miss that deadline, and you're stuck with the inflated assessment for another year.

Mark your calendar. Set a reminder. Don't let the deadline pass.

3. File an Appeal If Your Value Is Too High

If your assessed value is higher than recent comparable sales, you have grounds for an appeal.

Most California homeowners who appeal their assessment get a reduction. But only 5% actually file.

Don't be part of the 95% who overpay.

You have two options:

1. DIY: File the appeal yourself through your county assessor's office. Gather evidence (comparable sales, photos of condition issues, proof of errors) and present your case.
2. Let TaxDrop handle it: We gather evidence, file your appeal, attend hearings, and negotiate with the county on your behalf. We use a no win, no fee model — if we don't reduce your property taxes by at least $500, you pay nothing.

4. Budget for Higher Taxes Across the Board

Even if you successfully appeal your property assessment, expect other taxes to rise:

• Income taxes (if you're a high earner)
• Sales taxes (likely at the local level)
• Vehicle fees and gas taxes
• Utility costs (as PG&E and other providers pass on regulatory costs)

California's budget crisis isn't going away. Plan for higher taxes and adjust your budget accordingly.

5. Consider Your Long-Term Options

Some California residents are evaluating whether to stay in the state long-term.

High taxes, rising costs, and uncertain budget priorities are driving migration to lower-tax states like Texas, Nevada, Arizona, and Florida.

If you're considering a move, now is the time to run the numbers and think strategically about your financial future.

The Bottom Line

California lost $10 billion in federal funding. The state faces an $18 billion budget deficit this year — and $35 billion annual deficits starting in 2027.

Tax increases are coming. Income taxes on high earners. Sales taxes. Vehicle fees. And property tax increases through over-assessments.

What you can control:

• Check your property assessment when it arrives (June-September)
• Appeal if your assessed value is too high
• Don't miss the deadline (60 days in most counties)
• Make sure you're not part of the 95% who overpay

The state budget crisis isn't your fault. But you'll pay for it — unless you take action.

Don't leave $500-$1,000+ per year on the table. Make sure your property assessment is fair.

Ready to reduce your California property taxes? Get a free savings estimate at TaxDrop.com in under 2 minutes.

Sources

• Trump administration freezes billions in social services funding to five Democratic states | CNN Politics
• How the child care funding freeze could hit California | Axios San Francisco
• The 2026-27 Budget: California's Fiscal Outlook | Legislative Analyst's Office
• Report: California faces $18 billion budget deficit in 2026-27 | The Center Square
• California at Risk: Proposed Federal Funding Cuts Jeopardize Key Services | California Budget & Policy Center
• H.R. 1 and the Federal Budget: How California Leaders Can Respond to Trump's Cuts | California Budget & Policy Center