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Tech IPOs could be a boon to California finances in 2012

The capital gains taxes from initial public offerings can funnel hundreds of millions of dollars into state coffers. Can California bank on Facebook going public in 2012?

January 15, 2012|By Anthony York, Los Angeles Times
  • Signs point to Facebook going public in 2012. If Mark Zuckerberg's social network has a successful IPO, it could mean hundreds of millions of dollars in taxes get pumped into California's coffers.
Signs point to Facebook going public in 2012. If Mark Zuckerberg's… (David Paul Morris, Bloomberg )

Reporting from Sacramento — The future of California's public schools, universities and health programs could be linked partly to the fictional town of FarmVille.

The popular virtual world is the creation of Zynga, a San Francisco online game company that raised $1 billion in an initial public stock offering last year. Because California receives much of its income from capital gains taxes, such moves by businesses like Zynga can mean hundreds of millions of dollars for state coffers.

More California technology companies are poised to go public this year — including a widely expected $10-billion offering from Facebook — than at any time since the dot-com boom, experts say. Their success could relieve state officials of the need to cut state services more deeply in the budget year that begins in July, but Gov. Jerry Brown and his fellow Democrats are already squaring off over whether to count on the fruits of those transactions.

Some Democratic lawmakers, as well as some economists, have said Brown's newly proposed budget underestimates the strength of California's economic recovery, much of which is being driven by record profits in the technology sector and the surge in new public offerings. Officials in Brown's Department of Finance say they did not factor in a potential tax spike in the next fiscal year from, for example, a Facebook IPO.

"We haven't affixed a value to it yet, so it's not part of our forecast," spokesman H.D. Palmer said.

But the legislators, who note that it's not unheard of for a single company to boost the state's budget, are hoping Facebook will do for California what Google's IPO did in the last decade. 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, although it is unclear how much was due to Google.

"The state's revenues soared from the 'Google effect,' " said Sen. Lois Wolk (D-Davis), chairwoman of the Senate Governance and Finance Committee. "I expect we will see a surge in state revenue from the Facebook IPO in 2012."

The nonpartisan Legislative Analyst's Office concurred last week in a review of the governor's proposed budget. State revenue forecasts "need to be adjusted to account for the possibility of hundreds of millions of dollars of additional revenues related to the Facebook IPO," the analysis said.

There's a lag between the moment a company goes public and the state's receipt of any tax windfall. Executives and other employees often receive stock or options that typically cannot be cashed in until weeks or months after the IPO. But when the shares are sold, the state takes about a 10% cut of the profits.

And the profits can have ripple effects. "The money made from these IPOs is used for other things, some of them taxable — like real estate, for example," said Brad Williams, a former numbers cruncher for the legislative analyst.

So state officials are watching companies in Silicon Valley and San Francisco closely as they plan the next budget. Although California's unemployment remains high and other sectors of the economy are recovering slowly, large technology firms such as Apple and Google are posting record profits, and start-up energy in the valley and San Francisco is frenetic.

"When it comes to technology companies, we're now in the strongest period since 1999 and 2000," said Steven Levy, director of the Center for Continuing Study of the California Economy. And "unlike then, virtually all of these companies now have real employees, business plans, profits and customers. Facebook is a real company. LinkedIn is a real company. They have products and customers and sales."

Mark Heesen, president of National Venture Capital Assn., said about 40 companies headquartered in California have announced intentions to go public in 2012. Among them are Yelp, an online reviews site; Splunk, a data management company; and Proofpoint, a data security firm.

Still, Brown has called on lawmakers to reduce funding for state welfare programs, Medi-Cal and other services by March 1. Senate leader Darrell Steinberg (D-Sacramento) said that on the strength of the technology industry and other encouraging signs, lawmakers would hold off, waiting to see whether tax receipts increase enough to make deeper cuts unnecessary.

If the upward trend continues "even slightly," Steinberg said, "we may avoid the need to make the kinds of cuts the governor now suggests."

But predicting such things is an imperfect science. "We started out 2011 thinking we'd have more IPOs" than in 2010, Heesen said. Then instability in global markets, caused by economic uncertainty in Europe and political strife in the Middle East, made many companies nervous.

With employment improving nationally, Heesen is optimistic that 2012 will provide a more stable environment. As confidence in the economy grows, he said, it could ease the IPO backlog and create a boomlet of state tax revenue.

Fred Silva, an advisor to the public policy group California Forward, cautioned that any benefits could be short-lived.

"All the more reason to have a method to put some of this one-time money into some kind of reserve," he said. "… Hopefully by now we have learned our lesson."

anthony.york@latimes.com

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