If you live in California, use tax-funded roads, schools and other services, you’re on the Silicon Valley financial roller coaster whether you know it or not. The tech industry has contributed an increasing amount to the state budget, and even the way tech companies pay their employees has become a growing source of the state’s income tax revenue, a new analysis shows. Many tech companies pay their employees base wages as well as stock options. Vested stock options — options that have matured and are fully owned by employees, who can choose to sell them — are treated like ordinary income for tax purposes. Companies must pay withholding taxes on part of that income to state and federal governments. Last year, those taxes paid by the four largest tech companies in the state — Apple, Google, Meta and Nvidia — grew to at least $5 billion, making up more than 6% of all the state’s income-tax withholding, the Legislative Analyst’s Office estimated.
That’s up from 4% to 5% pre-pandemic, has more than doubled since 2016 and quadrupled over the past decade. That increase has come as those companies have grown tremendously in market value — the four of them are now worth more than $7 trillion. Last year, the withholding taxes they paid helped offset the effects of fewer initial public offerings on the state’s revenue.
Chas Alamo, principal fiscal and policy analyst for the office, did the analysis. He said that if he had the resources to do a deeper dive and had tallied the stock-equity withholding from all large tech companies in the state instead of just the biggest four, it might make up as much as 10% of all income-tax withholding. That’s on top of what the tech industry contributes to the state’s personal income-tax revenue, which makes it even more dependent on tech’s ups and downs. Historically, “withholding has been a stable barometer of how the state’s economy is doing,” Alamo said. “It hasn’t been subject to the volatility of the stock market. But that has changed over the last several years.”
All Californians have a stake in the health of the tech industry, because the state relies so heavily on personal income taxes for revenue. In light of a multibillion-dollar budget deficit and mixed signals around tech — which on the one hand continues to lay off employees but on the other hand is seeing an artificial-intelligence boom that has translated into gains on Wall Street — income-tax withholding from both tech employee wages as well as the withholding from their stock options matter more than ever.
...“The problem is it really disguises the true economy of California,” said Brooke Armour, president of the California Center for Jobs and the Economy. “When you have one small part of the economy that carries the state, that papers over the affordability crisis.”
Full story at https://www.mercurynews.com/2024/01/16/tech-is-growing-as-a-source-of-california-tax-revenue-thats-the-good-news-and-the-bad-news/.
Of course, volatility and the difficulty it poses for fiscal forecasting has an impact on the UC budget allocation from the state. The dependence on tech also explains why the governor tends to reject policies - such as the regulation of self-driving cars and AI - which tech moguls don't fancy.
Some wonder whether Gov. Newsom will want to propose some kind of major state fiscal reform before leaving office. He more or less said the answer is "no," even before taking office:
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