The state of California is hoping for another gold rush in the form of Facebook’s upcoming initial public offering, as a report by the California Legislative Analyst’s Office on the state’s 2012 to 2013 budget and revenue forecasts concluded that the IPO could bring the state up to $1 billion in revenue from personal income tax.
Facebook filed its IPO paperwork with the Securities and Exchange Commission at the beginning of the month, and some estimates have valued the company at more than $100 billion.
The California Legislative Analyst’s Office provides nonpartisan fiscal and policy advice to the California Legislature. Here are some of the Facebook-related highlights from the report:
In this forecast, we make an initial — and very rough — effort to incorporate personal income tax revenues the state would receive due to the possible Facebook IPO, which is widely expected to occur later this spring with an initial market capitalization of around $100 billion.
Facebook’s Form S – 1, its preliminary prospectus in advance of the possible IPO, contains hints about future anticipated tax liabilities of both Facebook investors and employees and the company itself. In particular, the prospectus discusses in varying levels of detail the IPO-related tax liabilities of (1) Facebook employees and others with option-like assets known as “restricted stock units,” and (2) the company’s founder and chief executive officer, Mark Zuckerberg.
While the prospectus contains important information in this regard, it lacks many details, some of which will be clarified in the days prior to the IPO and some of which will not. For example, the prospectus does not contain certain detailed information on several types of compensation provided to Facebook employees and executives, such as a description of the full variety of instances in which those persons could delay receipt of such compensation to later dates.
Importantly, the prospectus also does not describe in detail the precise manner in which various stock-related transactions with executives, employees, and others will result in withholding obligations to federal and state tax agencies. The prospectus also cannot tell us which of the company’s current major investors are Californians and when they may be motivated to sell their Facebook shares. Perhaps most significantly, the preliminary prospectus does not tell us when the IPO will occur and at what stock price, which will affect when (and in what fiscal years) tax revenues materialize and in what dollar amounts.
Given all of these uncertainties, there is a very large range of error around our initial Facebook personal income tax estimates. Specifically, we are assuming in our forecast receipt of $500 million of personal income tax revenue in 2011 to 2012 (assuming an IPO prior to the end of the current fiscal year results in significant PIT withholding or estimated payments in 2011 to 2012), $1.5 billion in 2012 to 2013, and much smaller amounts thereafter through 2015 to 2016. Should the IPO proceed, it appears virtually certain that the state revenue impact will be at least in the hundreds of millions of dollars, spread across a few fiscal years.
On the other hand, if the IPO results in a market capitalization of well over $100 billion and/or Facebook’s stock price climbs significantly above its IPO level (particularly in the first six to 12 months after the IPO), the state revenue benefit could be $1 billion or more over the level we assume, spread across a few fiscal years.
At this time, based on the limited information available to us, we believe the numbers included in our forecast are a reasonable initial estimate. As we discussed in the “Overview of the Governor’s Budget,” the Facebook impact on state revenues cannot be predicted in advance and will never be known retrospectively with any degree of precision.
Yet, given that an IPO clearly would benefit state revenues, we believe it is appropriate for policymakers to incorporate this into their budgetary discussions — whether they decide to expend Facebook-related personal income tax revenues in advance of their receipt or, alternatively, to adopt a more cautious approach in light of the many uncertainties in this area.
Readers: Do you think the California legislature should exercise caution and prepare for the lower estimates, or go for the gusto and plan for a $1 billion windfall?