Schwarzenegger on Thursday called for a special session of the state Legislature to address a deficit that has grown to $11.2 billion just six weeks after he signed the budget for the current fiscal year.
He said the state's economic condition has deteriorated significantly since then, with a cratering stock market and the continued decline of the housing industry.
California's budget relies greatly on capital gains taxes, which have dropped precipitously in recent months along with swooning stock prices. Sales and property taxes also have declined.
He said lawmakers will not be able to close the budget gap with cuts alone. He proposed a temporary 1.5 percent sales tax increase and other "revenue generators."