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Why Facebook's IPO may be worth $2.45 billion to California

The state could stand to net as much as $2.45 billion in new tax revenue over the next several years due to Facebook's IPO, according to its own estimates.

Mark Zuckerberg is apparently one of the people who will ease California's budget woes a bit.
Mark Zuckerberg is apparently one of the people who will ease California's budget woes a bit.
James Martin/CNET

Everyone knows Facebook co-founder and CEO Mark Zuckerberg will net billions in his company's initial public offering, but who knew California might just do the same?

The state's Legislative Analyst's Office (LAO) yesterday released a report on its expected income over the next several years and found that the state could net $2.45 billion in new tax revenue, thanks to Facebook's IPO.

California anticipates securing $500 million in tax revenue from Facebook during its 2011-2012 fiscal year, and then seeing that figure jump to $1.5 billion during its next fiscal year. Between its 2013-2014 and 2015-2016 fiscal years, the state expects to net another $450 million.

"Consumer confidence also could be constrained by a prolonged housing market depression," the LAO warned in its budget analysis. "Offsetting the possibility of such a slump are the recent reports of unusually strong price appreciation in a few California markets--most notably, the Silicon Valley--which has been attributed in part to recent and upcoming IPOs of stock for Internet companies, such as Facebook."

That said, the office is hedging its bets a bit, saying that the Facebook-related revenue figures are based on "rough assumptions."

"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," the LAO wrote. "Yet, given that an IPO clearly would benefit state revenues, we believe it is appropriate for policymakers to incorporate this into their budgetary discussions."

So, how did California arrive at its estimates? According to the office, it first considered the tax implications on Facebook's bottom line as it continues to grow. The social network alluded to those tax liabilities in its IPO prospectus but did not say what it believes those figures will be over the coming years.

More important for California, however, is the state's personal income tax collections.

Back in December, Reuters, citing several sources, said that Facebook could create well over 1,000 millionaires when it goes public later this year. The firm is also expected to make several people--chief among them, Zuckerberg--billionaires. When those folks starts to cash out their shares, the capital gains are taxed heavily, both by the federal government and the states. Since many of Facebook's millionaires will be California residents, they'll be taxed there.

"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," the LAO wrote. "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 6 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 point for California, determining how much it'll get out of Facebook and its employees is guesswork until it can see how everything plays out. But if anything is certain, based on the state's assumptions, more cities around the U.S. should be pushing to attract startups. It's amazing what a few major IPOs can do for a state's income statement.

(Via The Atlantic)