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Can Facebook IPO help solve a state budget crisis?

The Facebook IPO could bring California as much as $500 million in tax revenues from capital gains. Depending on whom you talk to, that's a significant help or a drop in the bucket. 

Headlines across this state are trumpeting the news: The Facebook initial public offering (IPO) 鈥� a stock sale that could happen as early as May 鈥� will help close the state鈥檚 budget gap.

The Sacramento Bee says聽state officials are 鈥済iddy over the prospect of Facebook money helping聽California聽dig out of a $9.2 billion deficit.鈥�

Closer examination shows that state tax revenues could benefit to the tune of about $500 million dollars, more than the $450 million in tax revenues generated when Google went public in 2004. But how much will that help the state?

To H.D. Palmer, spokesman for the state Department of Finance,聽鈥渃learly, this is a big deal.鈥�

He acknowledges the caveats: The impact depends when people sell their stock (likely spread over 18 to 24 months), and what the market conditions are at the time. And tax-privacy laws will make it hard to pinpoint exactly how much the IPO will help. But he is overjoyed.

鈥淚 have told folks that, on behalf of a grateful state, I will go to [Facebook founder] Mark Zuckerberg鈥檚 house and wash his windows and mow his lawn.鈥�

Analysts say that the company could be valued at between $75 billion to $100 billion, depending on demand.

The聽main source of tax revenue would come from capital gains on the sales of the IPO stock. 鈥淓xecutives and investors who had a stake in Facebook before the IPO stand to report the biggest gains if and when they cash in shares,鈥� says Stephen Liedtka, a professor of accounting at聽Villanova聽University, in an e-mail.

鈥淕iven the magnitude of the offering, it seems reasonable to predict that executives will indeed seek to cash in some of their stock over the next few years to reduce their overall risk," he adds. "This certainly could be a blessing to聽California.鈥�

But political analyst Barbara O鈥機onnor, says the money is a drop in the bucket.

鈥淚t is several hundred million. [It] will be filed in normal course of tax payments next year. Against $9.2 billion? Give me a break,鈥� says the聽director emeritus of the Institute for Study of Politics and Media at California聽State聽University,聽Sacramento.

Republican legislators are stressing that the IPO will provide only an unexpected, one-time uptick in revenue. Currently in a battle with Democratic Gov. Jerry Brown over a temporary tax-hike initiative he is offering this fall,聽Senate Republican Leader Bob Huff and Assembly Republican Leader Connie Conway issued a statement.

鈥淭he great news that Facebook will go public likely means an additional one-time windfall to the state鈥檚 treasury this next fiscal year," they said. "We should use this added revenue to protect our public school students from the Governor鈥檚 trigger cuts and pay down the state鈥檚 debt service.鈥�

But other analysts suggest that the sale could have a multiplier effect.

鈥淭here is a no question that an IPO like Facebook, and previously LinkedIn, add a real boost to the local economy the companies are located in as the employees often will benefit financially from their personal holdings in the company,鈥� says Gordon Tucker, managing director at Protiviti, a global risk-management consulting firm that specializes in IPO preparedness. 鈥淥ver time, as those employees sell stock, portions of those financial benefits get spent in the local economy on a variety of goods, like household goods, cars, etc.鈥�

Counting on such revenues, however, can have a downside, says Michael Shires, a public policy professor at Pepperdine University.

鈥淚t is important to remember that the last dotcom bubble was the major contributor to this state's critical financial crises of the past decade,鈥� he says. "Dependency on these speculative dollars is a dangerous bet for the state to make.鈥�