There are limits to taxing the rich. Just ask California.
California was counting on $1.5 billion in tax revenue through June because of Facebook’s (FB) initial public offering. It’s also counting on another $400 million in new sales tax revenue and new tax hikes on the rich.
But the state is now scrambling because it got hypnotized and overstated by a factor of nearly 50% the amount of capital gains tax revenue that it thought was coming in from the Facebook IPO. Based on Facebook’s latest share price, the state is on track to get just $707 million, 47% less than what it projected.
And now, California says expected funds for its $91.3 billion budget are at risk. The nonpartisan Legislative Analyst's Office admitted Wednesday that "if the company's stock price remains depressed, hundreds of millions of income tax dollars assumed in the 2012-13 state budget plan are at risk."
Facebook has sunk to a new low, 45% below the company's initial $38 share price. To date, it has never traded above $38, while California was betting on the shares sticking at $35 or higher. Last May, the state had bet the stock price would hit $42 by November, reaping $2.1 billion for the state, which faces a $15.7 billion budget deficit.
To date, three California cities have filed for bankruptcy protection: San Bernardino, Mammoth Lakes, and Stockton, the biggest U.S. city to date to file for bankruptcy.
California was counting on Facebook tax revenue to make up for an expected shortfall due to other businesses leaving the state to avoid higher taxes. The state heavily relies on its corporate and personal income tax system to fund its budget. State tax collections fell by $6.1 billion, or down 11%, versus the same period in 2011.
The number of upper bracket taxpayers, with $500,000 or more in annual incomes, dropped by a third from 2007 to 2009, leaving fewer to tax, the California Taxpayers Association notes based on data from the state’s Franchise Tax Board..
As of the 2009 tax year, California listed just 98,610 California tax returns with adjusted gross income of $500,000 or more, down 32.5% from the 146,221 in 2007. Now California admits it can never rely on its own estimates anyway, so nor should you.
It says in a new report “the confidentiality of individual taxpayer information means that there will never [emphasis California’s] be a precise figure concerning the actual amount of Facebook IPO-related taxes paid to the state.”
It also adds: “Moreover, it takes many months for tax data to be processed by the state's tax agencies.”
But it says it’s simply going to avoid these embarrassments in the future by “lumping” its Facebook estimates in with other numbers:
“At some point in the future, state revenue estimates likely will change to display Facebook-related revenues as simply ‘lumped in’ with the state's other taxes.”
Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007 and is the author of Skirting Heresy: The Life and Times of Margery Kempe (Franciscan Media, June 2014).
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.