Facebook's Stock Performance and the California Budget

By Autumn Carter, California Common Sense, Executive Director

Today, the L.A. Times reported that the Moody's credit rating agency is concerned about the impact of Facebook's falling stock price on California's budget. The piece stated,

A new report referred to the situation as a "credit negative development," which means it could dent the state's finances. The stock gained some ground on Monday, reaching nearly $22 before the end of trading, but that's still 42% below its debut price. 

Gov. Jerry Brown's administration estimated a $35 share price, which it hoped would generate $1.9 billion in tax revenue by the end of June 2013. The legislative analyst's office issued a report raising concerns about the share price last week. 

The Facebook case highlights the fact that California's budget has become increasingly vulnerable to the ups and downs of personal income in the state. Gains from sales of the stock are taxable as personal income.

In recent years, California budget has relied more and more on personal income tax revenue, a source that has seen major ups and downs. (Photo: California Common Sense)As other revenue sources are becoming smaller portions of the budget, personal income is becoming a larger portion of the budget.  This trend is illustrated in the graphs above -- personal income is represented by the brown lines. Adjusted for inflation, the brown line on the left graph shows total personal income tax dollars coming into the state since 1970, and the brown line on the right graph shows personal income tax dollars as a percentage of the state's total general fund budget. 

We see that both total revenue from personal income and the proportion personal income comprises are on the rise. But as we see on the left graph, personal income tax revenue has also been wildly inconsistent over the past decade. As the economy did well, income tax revenue was higher. But when the economy did poorly, the state struggled when the income tax revenue dropped.

This vulnerability to fluctuations in personal income is particularly apparent in the Facebook example. When it passed the budget earlier this year, the state included projections for $1.9 billion in post-Facebook-IPO capital gains tax revenue based on estimates of $35 per share. Instead, the stock is trading at around $22 per share, which will reduce the tax revenue the state will actually bring in through Facebook. The Legislative Analyst's Office (LAO) recently stated,

Between now and November, the company's stock price could be affected by various factors, including the company's third-quarter financial results (which may be released as soon as October).  If, however, the lower share prices persist through November and December, hundreds of millions of dollars of income tax revenue assumed in the state budget plan are at risk.

Ultimately, the uncertainty that the LAO highlights combines with the uncertainty that surrounds personal income levels in California overall. Income varies with performance of the economy, and at least in part, California's budget rests in the hands of that uncertainty.