Could Facebook’s Newly Wealthy Employees Help California’s Withering Economy?

Facebook’s slew of newly wealthy employees could “significantly impact” California’s economy during the next few years, said H.D. Palmer, deputy director of external affairs for the California Department of Finance.
“The closest analogue is the 2004 Google IPO,” he said. “Its benefit to the state’s general fund was in the neighborhood hundreds of millions– at least $400 million.”
Facebook, based in Menlo Park, Calif., afforded generous pre-IPO stock options to as many as 1,000 of its employees. They now stand to make a fortune when the stock goes public. One of the ways the state will make money is when employees cash out their shares and then have to pay taxes.
“If it’s as big as it’s advertised, it certainly has the potential to eclipse the Google IPO — but it won’t happen over night,” Palmer said. “While the potential revenue gain is certainly significant, it has to be viewed in the larger context of the legislature having to close a budget gap that we estimate to be $9.2 billion before the state’s new fiscal year begins on July 1st.”
There’s nothing currently built into the state budget, finalized in December, 2011, that reflects any increase in funds related to Facebook’s IPO. At the time, it was unknown when the company’s IPO would be announced. But the state will release a revised revenue forecast in May, which could reflect any Facebook IPO money affecting the state’s General Fund revenue for the coming fiscal year.
Jason Sisney, deputy legislative analyst for the nonpartisan Legislative Analyst’s Office which advises the California legislature on state budget issues, said that lawmakers are eager to know how Facebook will affect California’s economy.
Because tax records are private, no one will ever know the Facebook IPO’s precise impact on the state, but Sisney said his office must consider Facebook when they revisit the budget.
“Given the budgetary pressures they (legislators) face, they’re interested in not making more cuts than they have to,” he said. “This is more than a drop in the bucket, it’s a pretty noticeable chunk of money.”
But even the most optimistic estimates of Facebook’s revenue are not enough to cure the state’s mammoth budget woes.
“This is only going to be one relatively small piece of how California addresses its budgetary issues in the next few years,” Sisney added.
It also remains to be seen exactly how much California will benefit from Facebook and where the most revenue will come from — whether it’s from taxes on the IPO filing itself or on executives cashing out stock. When these various taxes are paid will determine which fiscal year California’s legislature can include Facebook in its budget.
Facebook employees with stock options won’t pay taxes until they sell their shares. Once Facebook employees sell their shares, the money will be taxed as personal income. The top marginal rate for personal income tax in California is 9.3%. Individuals whose adjusted gross income is more than $1 million pay an additional 1%, with that money going toward mental health programs under Proposition 63. In the 2011 tax year, about 1 percent of earners generated more than 40 percent of all the personal income tax in California.
“History suggests that a lot of investors will sell some of their stake and diversify their portfolios, to spend, to save, to give to charity and other purposes,” Sisney said.
Comparing Facebook with Google, Palmer said Google’s co-founders Larry Page and Sergey Brin sold most of their stock over an 18-24 month period.
Richard A. Walker is a professor at University of California, Berkeley, and an expert in economic geography and California. He said that as outside investors purchase Facebook stock, Zuckerberg and employees with stock options will become wealthier.
An influx of wealthy Facebook people buying property could also drive up housing prices in the San Francisco Bay Area. But he said that property buys won’t provide as much long-term help to the economy as purchases of things like cars, food, and hardware.
Walker also said that, while hundreds of newly-minted millionaires could boost the California economy somewhat, their newfound riches will also come with economic drawbacks. “On the other hand, these kinds of super-IPOs contribute to the class of very rich people and to the ongoing problem of class inequality in California, which is already very bad — one of the worst states in the U.S.,” Walker said. “While the tech boom today is a healthy contributor to the local economy, what the state needs more is ordinary jobs with decent pay, not just high-paid or very wealthy techies.”