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The Facebook website is displayed on a laptop computer. Will the IPO cure California's sickly finances?
Now that Facebook has set a date for its IPO — May 18 — produced a "road show" video and priced its offering at somewhere between $28 and $35 a share, there's renewed discussion of how the $90-billion-ish debut of this California company will improve the state's troubled finances. Here's the L.A. Times:
California is hoping Facebook will have a “Google effect” on the state’s economy. Capital gains tax receipts from stock sales rose to $54 billion in 2005 from $39.7 billion in 2004, the year Google went public, according to Franchise Tax Board figures.
When Facebook executives and employees cash in shares, the state takes a 10% cut of the profits.
In February, Legislative Analyst Mac Taylor became the first state official to estimate what Facebook's big Wall Street debut could mean for California's ailing budget. He said the IPO could pump nearly $2.5 billion into state coffers over the next five years.
This is a nice windfall for the state but it isn't the boon it looks like at first glance. In fact, it highlights a serious problem with the state's budgeting process: it's completely at the mercy of the earnings of the rich.
I wrote about this back in January:
The Los Angeles Times' Anthony York reports on a...disagreement between the Legislative Analyst's Office and California Gov. Jerry Brown. Brown's budget plan, released prematurely last week, calls for tax increases that would generate almost $7 billion in additional revenue each year, bringing the state deficit down to zero in five years — the time frame for the tax hikes.
Not so fast, says the LAO: it will only be $4.8 billion in 2012-13, then $5.5 billion thereafter.
Here's York:The wide discrepancy is the latest split over numbers between the administration and the Legislative Analyst's Office. Last November, the Legislative Analyst's Office released a revised estimate for the state’s current budget picture. Less than a month later, Brown’s department of finance came back with estimates that were $1.5 billion higher than the Legislative Analyst's Office numbers.
In its analysis Monday, the Legislative Analyst's Office said that predicting just how much Brown’s tax measure would bring in is difficult because it is dependent on income taxes from upper earners. That money varies wildly from year to year.
Actually, Brown's budget plan admits as much. And this points to an alarming problem with the state's finances: the wealthiest taxpayers now account for 22 percent of all income, up from 10.5 percent in 1980.
So we rely on the rich for nearly a quarter of all taxed income. No wonder it's become so difficult to get a good sense of what future tax revenues will be. Mind you, it's not that the rich are doing badly — booming and busting, rapidly cycling from caviar to hot dogs.
But they make the bulk of their money from capital gains, money earned by investing...money. Or by collecting rents on assets. [OR by selling Facebook stock!] This means that they're disproportionately exposed to market volatility. And the markets have been plenty volatile over the past couple of years.
Look, we're lucky to have Facebooks and Googles and Apples in the California economy. But their presence — and the activities of shareholders who pay taxes in the state — isn't going to solve the extremely pressing problems of a budget that's carrying a structural deficit of around $5 billion and that's facing unemployment that could climb above 11 percent again over the next few months (and that's unlikely to fall into the single-digits for years).
So welcome the Facebook effect. Just don't depend on it.