Headlines across this state are trumpeting the news: The Facebook initial public offering (IPO) – a stock sale that could happen as early as May – will help close the state’s budget gap.
The Sacramento Bee says state officials are “giddy over the prospect of Facebook money helping California dig out of a $9.2 billion deficit.”
Closer
examination shows that state tax revenues could benefit to the tune of
about $500 million dollars, more than the $450 million in tax revenues
generated when Google went public in 2004. But how much will that help the state?
To H.D. Palmer, spokesman for the state Department of Finance, “clearly, this is a big deal.”
He
acknowledges the caveats: The impact depends when people sell their
stock (likely spread over 18 to 24 months), and what the market
conditions are at the time. And tax-privacy laws will make it hard to
pinpoint exactly how much the IPO will help. But he is overjoyed.
“I have told folks that, on behalf of a grateful state, I will go to [Facebook founder] Mark Zuckerberg’s house and wash his windows and mow his lawn.”
Analysts say that the company could be valued at between $75 billion to $100 billion, depending on demand.
The main
source of tax revenue would come from capital gains on the sales of the
IPO stock. “Executives and investors who had a stake in Facebook before
the IPO stand to report the biggest gains if and when they cash in
shares,” says Stephen Liedtka, a professor of accounting
at Villanova University, in an e-mail.
“Given the magnitude of the
offering, it seems reasonable to predict that executives will indeed
seek to cash in some of their stock over the next few years to reduce
their overall risk," he adds. "This certainly could be a blessing
to California.”
But political analyst Barbara O’Connor, says the money is a drop in the bucket.
“It
is several hundred million. [It] will be filed in normal course of tax
payments next year. Against $9.2 billion? Give me a break,” says
the director emeritus of the Institute for Study of Politics and Media
at California State University, Sacramento.
Republican
legislators are stressing that the IPO will provide only an unexpected,
one-time uptick in revenue. Currently in a battle with Democratic Gov. Jerry Brown over a temporary tax-hike initiative he is offering this fall, Senate Republican Leader Bob Huff and Assembly Republican Leader Connie Conway issued a statement.
“The
great news that Facebook will go public likely means an additional
one-time windfall to the state’s treasury this next fiscal year," they
said. "We should use this added revenue to protect our public school
students from the Governor’s trigger cuts and pay down the state’s debt
service.”
But other analysts suggest that the sale could have a multiplier effect.
“There is a no question that an IPO like Facebook, and previously LinkedIn,
add a real boost to the local economy the companies are located in as
the employees often will benefit financially from their personal
holdings in the company,” says Gordon Tucker, managing director at Protiviti,
a global risk-management consulting firm that specializes in IPO
preparedness. “Over time, as those employees sell stock, portions of
those financial benefits get spent in the local economy on a variety of
goods, like household goods, cars, etc.”
Counting on such revenues, however, can have a downside, says Michael Shires, a public policy professor at Pepperdine University.
“It
is important to remember that the last dotcom bubble was the major
contributor to this state's critical financial crises of the past
decade,” he says. "Dependency on these speculative dollars is a
dangerous bet for the state to make.”
