Could Facebook Save California?
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Dec 21, 2010 12:07 PM ET |
16 Comments
As most of you have undoubtedly noticed, Facebook is trading at a $67b valuation on the secondary market. It is likely to go public in 2011/12, or thereabouts, as will almost certainly a host of other California-based tech high-flyers.
That will have implications in 2011 and 2012 for perpetually financially flailing California. Why? Because California’s budget is hugely levered to capital gains and stock options, as the following California LAO figure shows. Personal income tax is the largest source of state income, and the most volatile component of that source is stock options and capital gains.
When personal income is doing well, California does well (or at least as well as it’s possible for it to do given its budgetary structure). Check the following LAO figure showing California income in billions from stock options and capital gains during and after the dot-com bust. To make the case in an extreme way, at peak California’s capital gains and stock option-related tax revenues would have offset the state’s current $18-billion deficit.
To make things much more realistic and recent, in 2006 California received $11.3b in personal tax receipts, $4.3b more than the previous tax year. A main difference? One company: Google. The newly-public company’s executives and rank & file employees cashed out stock & options at a furious rate, accounting for much of the increment.
At the time, Google’s public market capitalization grew from $70b to $100b. The lower end is approximately the current secondary market capitalization of Facebook, the current IPO market object d’ardor. There are more California companies coming public, however, almost certainly including Zynga, Linkedin, et al., which would add materially to this total market capitalization of newly public companies seeing option exercises.
All else being equal, I’m guessing California will report a surprise spike in 2011 and 2012 personal tax receipts. It is over-leveraged to personal income, of course, and, within that, to stock option exercises and capital gains. But those will all jump much higher in the coming 24 months, and seems to have escaped most analysts’ scrutiny as they project California flat-lining into being the next Greece.
Now, will all of this save California? No, of course not. There is a structural budgetary problem in California, one that just becomes more obvious when its personal income receipts collapse. But the path to any future insolvency for California is going to be much more circuitous than most people think.
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Reader Comments (16)
Diana Dec 21, 2010 2:53 PM ETNo, but taxed marijuana sales could.
It is amazing how much facebook has grown. Almost every person I know has an account there. This is really the giant in the social media.
rabota v internet
A pathetic, business-unfriendly, degenerate state like CA does not deserve to benefit from companies like Google, FB and Linked-In. If any other nation/state in the world had this much wealth of knowledge creation, good weather, great universities etc they would be vastly better off than CA. But, incredibly, CA just wants to rest on its laurels and implement a broken liberal budget and repressive tax and regulation scheme, while getting bailed out of its woes by miracles like Google and FB. Their day of reckoning may be delayed, but it is surely coming.
Well, I am not sure if FB will save California. I am not sure how taxing the Golden Goose will help. That big swooshing sound about to be heard will be the exit of corporations and capital as well as the "wicked rich". I know my option to export my wealth will be exercised before people wanting to eat my piece of the pie lift a fork. Call me selfish for working all my life sacrificing and saving for the long winter of someone else's discontent. I am sorry Mr. Grasshopper didn't put up when he could. When the snow flies, this ant is headed underground.
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Il semble que vous soyez un expert dans ce domaine, vos remarques sont tres interessantes, merci.
- Daniel
The problem is, when that spike comes, the geniuses in Sacramento will assume it is permanent, like the 2001 spike, and hike state pensions and other spending. The genius electorate will concur, and pass more "this bond is not a tax" bonds that are ultimately claims on tax revenue. Can you tell I'm depressed about the state of my state?
It is really pathetic to talk about Facebook. It is a gigantic waste of time and produces zero value for almost all its users as well as the US and world economy as a whole. It will eventually die as people come to their senses and realize how much time they waste on it, it will just end up to be like an online phone book to find and contact people.
So, once more the junkie gets a fix.
As a multi-generational native Californian I have watched this state go from an industrial powerhouse with some of the best roads and schools in the country to a hollowed out shell with deteriorating infra-structure and schools falling farther and farther behind the national average (and sinking out of sight on the world scale).
California USED to have an economy that was rated in the TOP 5 for the entire world. Now it has slipped to 8th and is rapidly loosing ground as increasingly insane regulations and taxation policy drive business to other states.
Texas will soon pass California in terms of economic output.
Why? The answer is based on a business friendly environment and rational tax policy.
Until California is finally crushed financially and FORCED to go through a bankruptcy that will strip the state unions of their (insanely bloated) pensions and benefits you will continue to read stories such as this one.
Would not be surprised to see some of these "high tech saviors" move out of California
Greetings,
Maybe this is worth sharing that i found in "http://www.bloomberg.com/blogs/paul-kedrosky/2010/12/could_facebook_save_california.html" few posts below.Car Covers
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Paul Kedrosky is one of the preeminent financial market observers and author of the widely-read blog Infectious Greed. For this blog, Dr. Kedrosky will draw on his experience as a former technology analyst, institutional money manager, and venture capitalist to provide daily commentary on a variety of topics covering finance, current affairs, science, and yes, even the weather. Dr. Kedrosky is an active investor in public and private equities.
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