Budget, Tax Debate Create a Tightrope for Newsom’s Last Year

California Gov. Gavin Newsom, set to deliver his last State of the State address Thursday, will outline a budget amid a projected $18 billion shortfall that is triggering debate among his fellow Democrats about the best way to stave off cuts to priorities such as Medicaid.

The state’s finances offer the governor little room to announce ambitious new initiatives as he prepares to leave office next year as a contender for president in 2028. Newsom, who is serving the last of his two terms, may be buoyed by higher revenue than previously expected that potentially would allow him to avoid ...