California Financing its Budget Through Internet Bubble 2.0

California Financing its Budget Through Internet Bubble 2.0

California is still struggling with the aftereffects of its housing bust, but some economists say there is hope for the state’s finances in the rise of Internet darlings like Facebook Inc.

The state expects an increase in revenue in 2013, largely because of the Silicon Valley recovery that has benefited giants like Apple Inc. and spurred initial public offerings from a batch of younger firms.

In particular, some economists say, the state stands to gain from taxes from employees of post-IPO companies when they sell their stock, along with taxes on wages and stock sales by employees of older Silicon Valley companies.

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“With the Facebook IPO coming, that’s the tip of the iceberg in Silicon Valley,” says Dennis Meyers, the state’s principal economist, who notes that post-IPO stock sales will likely boost those workers’ income taxes.

Gov. Jerry Brown earlier this month unveiled California’s most upbeat fiscal forecast in years, predicting total general-fund revenue would climb to $95.4 billion in the fiscal year ending in June 2013 from a trough of $82.8 billion in fiscal 2009, during the recession.

The state is projecting a $9.2 billion deficit for fiscal 2013, the smallest since fiscal 2008. Mr. Brown is hoping to close the gap with cuts and new temporary taxes Californians will vote on in November.

Other reasons for optimism include California’s improvement in trade with countries like China that hunger for goods ranging from fruit to high-tech gadgets. “We’re doing very well,” says Steve Levy, director of the nonpartisan Center for Continuing Study of the California Economy.

As an example of how Silicon Valley wealth affects state finances, consider 36-year-old Danis Dayanov. When Mr. Dayanov started working as an engineer at LinkedIn Corp. in 2005, he received restricted stock. He left in 2010 to start his own venture, and his income—and income taxes—shrank.

After LinkedIn’s IPO last year, Mr. Dayanov says he sold less than $100,000 of his stock in the company. Largely as a result, he expects his income to contribute $25,000 to $35,000 of his family’s 2011 California income taxes, versus under $10,000 in 2010. He says he expects to sell more LinkedIn stock over the next several years, which will generate more tax revenue.

California still suffers from the consequences of the housing bust, which hit the state hard and took a toll on its budget. The construction industry remains sluggish and the state’s unemployment rate, at 11.3% in November, the latest available figure, is well above the national average.

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