California stands to gain hundreds of millions of tax dollars after Facebook goes public, but fiscal analysts say it's hard to predict when that money will flow into state coffers.
The Menlo Park-based social media giant filed papers today to launch a $5 billion stock offering, and state officials are giddy over the prospect of Facebook money helping California dig out of a $9.2 billion deficit.
The state's nonpartisan Legislative Analyst's Office, dubbing the potential state windfall the "Facebook Effect," estimates California could receive more than $1 billion across the next several years. The Department of Finance has not included the Facebook IPO in its projections, while the Analyst's Office assumed some stock offerings would take place, though not one as large as Facebook's.
"We don't know what the specific amount is going to be, but if it's as significant as it's projected, then on behalf of a very grateful state, I will happily go to Mark Zuckerberg's house and wash his windows or mow his lawn," joked H.D. Palmer, spokesman for the state Department of Finance, referring to the company's CEO.
California would gain once Facebook insiders sell shares and pay state income taxes on their gains.
If voters approve Gov. Jerry Brown's tax plan in November to raise income taxes on wealthy earners (in addition to hiking the state sales tax by a half-cent), Facebook employees could pay as much as 12.3 percent to the state on income above $1 million. Tax proposals by the California Federation of Teachers and attorney Molly Munger would impose higher rates than Brown's plan.
Without any tax hike, millionaire rates would be at 10.3 percent, including the one percentage point tax for mental health services.
The big question mark is when those employees will begin selling -- and paying the state. While Brown and lawmakers would love for money to flow as soon as possible, LAO forecaster Jason Sisney says it may take a couple years for the state to benefit.
It typically takes a few months for firms to go public after filing their IPO paperwork. Then, employees must wait to sell their shares; Facebook's filing suggests that employees must wait between three months to seven months. It is not yet clear how many shares are subject to the six- and seven-month delays.
If the IPO takes place in April, employees would likely begin selling shares before the end of the year, soon enough to help California's current budget problem. If the IPO doesn't happen until June or July, employees may not sell shares until early 2013, too late to help the state's immediate deficit because the bulk of taxes wouldn't come in until April 2014.
Sisney said that when Google went public in August 2004, the state's biggest benefit came in April 2006. A similar delay could occur this time.
"The best scenario is that this happens sooner, preferably in April, because then you'll have potential activity in 2012," Sisney said. "The sooner, the better for the current state budget process."
There could be minor immediate gains from California ground-level investors who flip the stock this year, though Sisney said that would be dwarfed by the eventual sale of insider shares.
"It's great," said Senate President Pro Tem Darrell Steinberg, D-Sacramento, of the Facebook IPO. "But I think we need to be a little bit cautious in terms of the near-term impact."
Senate Republican Leader Bob Huff, R-Diamond Bar, suggested that Facebook insiders would have motivation to sell by the end of 2012 if they think federal tax cuts will expire this year. Long-term capital gains would be taxed at 20 percent instead of 15 percent next year if that happens.
Huff said that any additional tax revenues should go to education - rather than rolling back health and welfare cuts that Brown has proposed. Under the governor's budget, if voters reject higher taxes, the state would cut school programs by $2.4 billion.
Updated to include comments from Sen. Bob Huff and clarify that the Analyst's Office has already forecast some IPO activity.