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Bill Leonard

Can Facebook Save Jerry Brown?

The short answer to the title question is No. Although from the way the press flaks for him you might believe the opposite. Now that I hear others repeating the press cover story that the upcoming Facebook IPO is going to balance the state’s budget I have to speak out.
Facebook is a worldwide corporation that happens to be based in California. It is engaged in a constant battle with the other Internet behemoths such that it either must grow or die. One possible way of growing is to take the corporation public raising the financial resources to effectively compete. Thanks to past Wall Street scandals the process for going public with stock sales , known as the Initial Public Offering (IPO), is expensive and time consuming. The rumors are growing that Facebook will publish the preliminary filings in the next few weeks starting a minimum four month process before the IPO can occur.
However, aside from the California corporate taxes that Facebook already pays, there is no taxable transaction in an IPO. The initial sale of stock from the corporation to the public does not generate any income and therefore no tax is due. There is no possible windfall for California government spend-a-holics from the IPO itself.
Assuming the IPO actually takes place, it is at that point in the future where millions of shares of stock will be sold to thousands of big investors (you and I rarely get in on the first transaction of IPOs). This sale from Facebook to these first investors is NOT a taxable transaction as there is no taxable gain. It is merely Facebook transferring a portion of its current value to new shareholders.
Then it gets interesting as the market takes over. If the IPO price was too high, the market will recognize that by forcing the stock price down. This is a capital loss which could lower the taxes of the shareholder who sold the stock. Or the price could stay flat with the market waiting until Facebook shows how it is going to prosper using all the new capital it has raised. Either way California reaps no windfall.
Only if the market price rises and only if the shareholder sells is there a taxable transaction based on that taxable gain. Only if the seller is a California and only if a large amount of shares are sold does the transaction take on the aspects of a windfall. Then Jerry Brown gets 9.3% of the gain. Most of the millions of shares of Facebook will be owned by non-Californians and again California will gain no windfall even if they are sold. The 9.3% is the California income tax rate on high earners unless you are already a millionaire then its 10.3%
What Jerry Brown is hoping is that the California based leadership of Facebook will decide to sell a large amount of shares at a profit as soon as it is possible. To do this they must first of all wait through the SEC mandated quiet time after the IPO where corporate executives are forbidden to sell. Then if they do sell they must notify the SEC and the public of their intention to sell. If they sell too much they risk losing control of the company or they risk panicking other shareholders who then may sell themselves triggering a downward cascade in price. Once all this takes place they will owe the California tax only on the amount that the stock has risen since the IPO price. In other words Facebook executives cannot be counted on to suddenly pay millions more in taxes just in time to overflow the state’s bank account.
This Hollywood ending did happen a few years ago where a year after the IPO of a big dot com company a few key California based executives did sell a portion of their stock for an enormous capital gain. That taxable gain paid to California was enough to change the revenue figures for that tax year by a goodly amount. Could it happen again?
Yes, it is possible that all of these factors come together and California government gets a take of these taxable transactions either in the year they occur or by the following April 15th. And its even possible to fantasize that the tax take approaches a billion dollars like the big one.
But even a $1,000,000 000.00 extra dollars will not balance the current budget!
Even if all this happens on Jerry Brown’s watch it is a only a one time transaction. It is unlikely to happen again. One time money is the most dangerous kind to big spenders. If they use the money to create new programs or increase obligations then the following year(s) will be disasters. This is what the state did the last time it got the big money. One time money is a windfall and California leaders should thank the Facebook folks for their success and then not spend that money on programs.
Paying down debt, or funding pension liability is not politically attractive but it is one of the few responsible uses for windfall money. Can our Governor be responsible? Can our press stop misrepresenting the facts? No IPO will bail out the state of California.


One Response to “Can Facebook Save Jerry Brown?”

  1. Robert Bosich Says:

    In Utopia all is possible for pimple faced, naive reporters and assorted media bizzaros from Berkley, Santa Cruz, West LA, Marin County…

    The real story: Teach a liberal how to fish and the next day the lib is back begging for fish.

    IT’S ONLY FAIR!!!!