Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters. The social network's IPO didn't deliver the big capital gains taxes that California was counting on.
On Wednesday, KPCC's Julie Small caught up with the California state finance department and reported on the "Facebook Effect" that failed to live up to intial expectations. The state of California had anticipated a windfall from the sale of stock by employees of the gargantuan social network after its initial public offering.
We all know how the IPO went: it was a massive disappointment. Facebook opened at $38 a share and hasn't climbed back to that offering price since Day 1 of trading. Now it's bumping around in the high $20 range, but it fell below $18 earlier this year.
California still collected a decent amount of tax revenue from Facebook employees and investors who sold stock. But the finance department had initially projected almost $2 billion; it got half that.
This is sad, but there's a far sadder factor at play, and it's called...the "Facebook Effect!"
Ever long for the days of Dow 1000? If you have a job but no money, maybe you should.
Felix Salmon has a great post today about, basically, why we need to tax capital gains at a higher rate. I made a rare Tuesday appearance on "America Now" — the radio program hosted by the always lively Andy Dean, with whom I usually discuss and debate economics and business on Fridays — and wound up talking about this very topic, as it relates to Mitt Romney's taxes.
In a nutshell, capitals gains is income derived from investment returns — selling stocks and bonds, or collecting dividends, that type of thing. The argument in favor of keeping them lower than income tax is that people with money to invest, i.e. the affluent, need an incentive to keep investing. The idea is that a virtuous circle will be created, with investment creating jobs and jobs creating income and that income being invested, by people who wouldn't otherwise invest. Presto! Economic growth!
The volatile incomes of the wealthy, mostly derived from capital gains, are causing ongoing problems for California to develop successful budgets.
The independent State Budget Crisis Tax Force has released its analysis of California's finances and found that rather than being a whopping $28 billion in debt, as Gov. Jerry Brown alleged with he came to office, the state is actually a nearly unfathomable $335 billion debt. Brown called it a "wall," as the New York Times noted. But it's really more like a dozen walls. All stacked on top of each other to make a mega-wall that blocks out the Sun.
This is not an exaggeration. Californian's total level of debt, on and off the books, is pushing a fifth of the total annual economic output of the state, which is about $2 trillion.
Some of the usual suspects are responsible for this: overspending and undertaxing during boom times, colossal pension liabilities, taking on too much debt. But the report zeroed in on an important area that I've written about before: a California tax system that relies far too much on the incomes of the wealthy, and in particular on income derived from capital gains, or the sale of stocks, bonds, and other assets (see the chart above, which I grabbed from the report).
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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.
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They have nothing to do with Frank McCourt or Magic Johnson.
Tax day (extended to April 17 from the familiar April 15) just passed, but the Buffett Rule has been blocked in the Senate. That's the intertwined story from taxland over the past few days. The timing is interesting because, understandably, a lot of people get...more than mildly annoyed whenever they have to do their taxes AND there's a movement on the political left gaining steam to hit the wealthy with higher taxes.
Those on the right are horrified. The impasse means that there just had to be a split-the-difference, "third way" solution on the horizon, and it arrived on Monday, in the form of a New York Times op-ed by Syracuse professor Leonard Burman. He doesn't like the Buffett Rule, but he does believe that capital gains taxes — the taxes that, for example, mega-rich hedge-fund managers pay in income treated as investment returns — should be restored to Reagan-era levels.