When Facebook went public nearly two years ago, the then-cash-strapped state estimated it would draw in a welcome $2.5 billion in income tax revenue over four years, more than a quarter of the state’s shortfall that year. California no longer faces a deficit and the state’s Legislative Analyst’s Office hasn’t done the same analysis for Twitter, in part because the company is valued at about a fifth of Facebook’s market capitalization at the time of its IPO.
But a look at some of the numbers in Twitter’s initial S-1 filing provides a very rough idea of the tax revenue the state can hope to reap. Jim McHale, a public accountant at James J. McHale, CPA in San Francisco, puts the figure at $303 million, at least.
Twitter’s S-1 filing last month indicated that, as of Sept. 30, the company had nearly 43 million outstanding stock options and warrants and had given employees 85.7 million shares of restricted stock units—essentially stocks that can only be sold after a certain period of time. All of it can become taxable compensation.
Using Twitter’s projected $26 share price, and subtracting the average cost to exercise options and warrants, the taxable compensation adds up to $3.3 billion. McHale applied California’s marginal tax rate of 9.3% for individuals making more than $46,766—one of the highest rates in the country—and found that the state would be owed $303,359,728.
There are a few major caveats. For one, most of those stock options and RSUs can’t be exercised (or taxed) for months, if not years, at which point the share price will presumably have changed (upward, employees hope and some analysts predict). Second, Twitter has issued more stock options and RSUs since McHale constructed the model. Third, not all option and RSU holders are necessarily individuals in California.
And finally, some of the largest holders of Twitter shares are well above the 9.3% tax bracket—well above—in a state with the highest high-income tax rate in the country. The rate for individuals in California with income of more than $500,000 is 12.3%, plus another 1% mental health surcharge for incomes over $1 million, McHale said.
“In other words, using 9.3% is a little on the conservative side and CA could earn a lot more,” he said in an email.
The state benefits from San Francisco’s 2011 deal to issue Twitter a payroll tax break to convince the company to stay in town. McHale calculated last month for the San Francisco Chronicle that the deal cost the city $34 million in lost funds—since up to $48.9 million as a result of Twitter’s revised share price—but then again it would do no good for the city if the firm’s new millionaires were spending their money in Texas.
“The success of California’s technology companies is a key part of its current economic story,” wrote Jason Sisney, deputy legislative analyst at the state’s LAO. “As state revenues are doing very well right now, no doubt an important part of that trend is the success of our technology companies, their investors, and their employees.”