News

Looking for $400 million? Google it.

Next year’s California budget will use Google to find as much as $400
million in extra revenues. That’s how much money the mega-popular search
engine company will pour into state coffers in the form of taxes on stock
options exercised by the California-based company’s top executives.

As of late November, 14 of the top directors and executives at Google had
cashed in a combined $4.35 billion by selling 18.6 million shares of stock,
according to an analysis by Thomson Financial.

Google co-founders Larry Page and Sergey Brin led the pack by selling 5.3
million shares for nearly $1.3 billion each.

With all 14 of the executives easily breaking into the state’s top personal
income tax bracket, the state will siphon off 9.3 percent of the $4.35
billion in stock options earnings (minus deductions) into the state’s
general fund via taxes. That amounts to a one-year revenue spike of as much
as $404 million.

“When you are talking hundreds of millions that is noticeable,” said Howard
Roth, chief economist at the Department of Finance, which is currently
crafting next year’s budget.

The potential uptick in revenues from Google is part of a better than
expected economy that the Department of Finance reports has resulted in
revenues that are almost $1.9 billion above forecasts since July 1.

While the $400 million figure is only a “back of the envelope” estimate,
Roth says that the revenues from Google “could add up to something much more
spectacular” if other employees beyond the 14 Thomson Financial analyzed are
included.

“Right now the story is one tech company,” said Brad Williams, the director
of fiscal forecasting at the nonpartisan Legislative Analyst’s Office. “It
is same phenomenon [as the late 1990s] but it is just one company–but one
very successful company with a very big profits and a lot of stock options.”

Google would not be the first company to have its employee’s stock options
register an impact on the California budget. According to an analysis by the
Department of Finance, the ten biggest California-based companies in terms
of market capitalization accounted for 34.6 percent of all stock options
revenue in 2000, with Cisco Systems alone accounting for 12.6 percent.
In 2005, Google is estimated to account for 13 percent of the state’s stock
options revenue.

Steve Levy, director and senior economist of Center for the Continuing Study
of the California Economy, says that the key question is whether, “the
Legislature and governor next year really going to treat this as one-time
money or are they going to use it to fund ongoing general obligations?”

Some budget observers fear that the money, which is expected to be a
one-time windfall, will be a tempting pot of gold for the Legislature and
governor to earmark for ongoing expenditures or new programs, the very
actions that help bring about the state’s current structural deficit.

When California was the center of the dot-com boom in the late 1990s, tax
receipts poured into Sacramento. Tax revenues from stock options and capital
gains jumped from $7.5 billion in 1998-9 to $12.7 billion in 1999-2000 to
$17.6 billion in 2000-1. Those additional revenues were used to finance
program expansions in education and healthcare, and to fund permanent tax
cuts.

But when those stock options and capital gains revenues plummeted by $9
billion in 2002, and no adjustments were made, the state was suddenly
saddled with a deficit.

Next year’s budget outlook looks better than it has in several years,
according to a November report by Legislative Analyst Elizabeth Hill. But,
she added, “the state is still not out of the woods.”

Budgeting experts are hoping that the one-time windfall of hundreds of
millions in taxes on Google executives will be reserved for one-time uses
like paying down the existing debt, lest the Google boom create another
budget bust.

But, said Levy, “the track record is they will say, ‘Why do we have to face
up to hard choices now if we can wait a year?'”


Support for Capitol Weekly is Provided by: