Could California Actually Withhold $80 Billion in Federal Tax Payments If Trump Cuts State Funding?

California Governor Gavin Newsom has ignited a high-stakes political confrontation by suggesting the state could withhold billions in tax payments to the federal government if President Donald Trump follows through on reported plans to slash federal funding to the Golden State. The threat has escalated tensions between California and the Trump administration while raising complex legal questions about the limits of state power.

The dispute began when CNN reported that the Trump administration was preparing a "large-scale cancellation" of federal funding for California, specifically targeting the University of California and California State University systems. CalMatters detailed how federal agencies are being directed to identify grants that could be withheld from the state.

Newsom responded forcefully on social media Friday, posting that "Californians pay the bills for the federal government. We pay over $80 BILLION more in taxes than we get back. Maybe it's time to cut that off, @realDonaldTrump." According to CBS News, California contributed $806 billion in federal taxes during fiscal year 2023-24, nearly twice as much as Texas and more than twice New York's contribution.

Treasury Secretary Warns of Criminal Charges

Treasury Secretary Scott Bessent swiftly condemned Newsom's suggestion, warning in a social media post that the governor "is threatening to commit criminal tax evasion." Fox Business reported that Bessent called the plan "extremely reckless" and warned that "federal law attaches personal liability to an attempt to evade or defeat tax."

"His plan: defraud the American taxpayer and leave California residents on the hook for unpaid federal taxes," Bessent wrote, adding that California businesses understand that "failing to pay taxes owed to the Treasury constitutes tax evasion." The Treasury Secretary suggested Newsom should instead "consider a tax plan for California that follows the Trump Tax Cuts model."

Key Officials Navigate Uncharted Territory

H.D. Palmer, Deputy Director for External Affairs at California's Department of Finance and the administration's longtime fiscal spokesman, provided context for the state's position. Palmer, who has served under multiple governors from both parties since 1993, told KCRA 3 that "the power of the purse doesn't lie with the (presidential) administration" but with Congress.

From his office at the California Department of Finance, Palmer outlined how the federal government provides approximately $170 billion in grants across various state programs, with the largest being $100.9 billion for medical assistance programs. The agency's headquarters are located at the heart of the dispute over federal funding.

Assembly Speaker Robert Rivas, a Salinas Democrat, echoed the governor's sentiment on social media, stating that California "must look at every option, including withholding federal taxes" because the state is "the nation's economic engine and the largest donor state." According to CalMatters, Rivas was unavailable for questions, with his staff declining to elaborate.

Legal Precedents and Constitutional Questions

The confrontation echoes previous legal battles over federal funding and state autonomy, particularly regarding sanctuary city policies. Reuters reported that the Supreme Court previously dismissed cases involving Trump's first-term attempts to withhold federal funds from sanctuary jurisdictions after lower courts were divided on the policy's legality.

Federal courts have consistently held that the executive branch cannot unilaterally impose funding conditions that are "coercive" or unrelated to the federal interest at hand. National Immigration Forum analysis shows that in NFIB v. Sebelius (2012), the Supreme Court ruled that threatening to withdraw funding essential to state operations was analogous to holding a "gun to the head" of states.

However, the legal framework for a state attempting to withhold tax payments to the federal government remains largely untested. CalMatters consulted tax experts who noted that residents and businesses pay federal taxes directly to the IRS, making it unclear what mechanism California could use to intercept those payments.

Political and Economic Stakes

The dispute comes amid broader tensions over transgender athlete policies, immigration enforcement, and federal oversight of state universities. The Washington Post reported that Trump has repeatedly targeted California throughout his political career, and the current administration is also considering similar funding cuts to other Democratic-led states, with Maine potentially next on the list.

California's economic leverage cannot be understated. According to KTLA, California is now the fourth-largest economy in the world, and the state is one of only 13 that send more money to the federal government than they receive back. A 2022 study by the Rockefeller Institute of Government found California provided about $83 billion more to the federal government than it received.

The practical mechanisms of any potential tax withholding remain murky. Tara Gallegos, a spokesperson for Governor Newsom, told reporters the state is exploring "whether there are potential options that would allow it to retain some of the funding it typically sends the federal government," but declined to provide specifics or identify which staff members are examining the options.

Expert Analysis and Skepticism

Tax policy experts remain skeptical about the feasibility of California's threatened approach. Jared Walczak, vice president of state projects for the Tax Foundation, told CalMatters that "courts have made it abundantly clear that you can't be a conscientious objector to paying taxes."

Walczak also disputed California's characterization as a "donor state," arguing that "unless California politicians are questioning the legitimacy of Medicare, Medicaid, and Social Security, the complaint that California residents pay more in federal taxes than they get back is disingenuous."

The White House has maintained that no final decisions have been made regarding California funding cuts. Deputy Press Secretary Kush Desai said in a statement that "no taxpayer should be forced to fund the demise of our country" while criticizing what he called California's "lunatic anti-energy, soft-on-crime" policies. However, he emphasized that "any discussion suggesting otherwise should be considered pure speculation."

Historical Context and Future Implications

This standoff represents the latest chapter in California's ongoing legal battles with federal authorities. The state has filed numerous lawsuits against federal policies and has been particularly vocal in opposing immigration enforcement measures and environmental policy changes.

Palmer noted in his interview that the current dispute is "just another inning in a very long game that has been going on since the beginning of the year," emphasizing that state officials have "made it very clear that we're not going to back down from our values if there's a threat to California."

The confrontation also highlights the complex relationship between federal and state governments in an era of increasing political polarization. As both sides have escalated their rhetoric, the ultimate resolution may require either compromise or court intervention to clarify the constitutional boundaries of state and federal power over taxation and funding.

Congressional Republicans from California have sought more information about potential federal cuts, while Democratic representatives have pushed back against what they characterize as political retaliation. The dispute's resolution could set important precedents for future conflicts between states and the federal government over funding and policy compliance.