San Francisco Chronicle - (Sunday)
How S. F., state reap rewards of IPOs
There’s good news for those who didn’t invest in or work at Airbnb, DoorDash, or others of the dozens of Bay Area startups that went public this year. Your fortunes will still be boosted from 2020’ s recordbreaking crop of Wall Street debuts.
Those who live in California will see benefits from blockbuster initial public offerings from the likes of Airbnb and DoorDash as the state fills depleted coffers with tax revenue from all the newly minted billionaires, millionaires and hundred-thousandaires. The state and cities will also reap economic benefits as those folks spend their newfound riches.
The main benefit to the state comes through income taxes. California taxes capital gains — the profit made from sales of stock — as ordinary income. Initial public of
ferings result in extraordinarily high compensation for employees, executives and investors. When they exercise options, sell shares or vest stock awards, they will owe taxes, probably at the top rate of 13.3%.
“With state revenue being down, ( the stock windfalls) will certainly help meaningfully,” said Jon Ekoniak, a partner at Bordeaux Wealth Advisors in Menlo Park. “The initial predictions of California budget shortfalls won’t be nearly as big as we’d feared.”
In many cases, the income bumps don’t occur until six months after an IPO because a lockup period prohibits insiders from cashing out too soon. But San Francisco vacationrental company Airbnb, which enjoyed the year’s most successful offering on Thursday, ending the day worth a cool $ 100 billion, was more liberal. Its employees and others were allowed to sell up to 16.8 million shares on Thursday.
There are also the proceeds of offerings to consider. Sales by employees and investors benefit those individuals, but not the company itself. The newly issued shares companies sell to the public yield cash for the corporate treasury. Over time, companies spend that money on real estate, salaries and acquisitions, which can further boost the economy.
California bean counters already track initial public offerings and factor them into budget forecasts, said H. D. Palmer, a spokesman for the state Department of Finance. But its last official projections came out in April when Wall Street appeared on the verge of collapse because of the pandemic.
Instead, the stock market had a phenomenal year, achieving alltime highs. Offerings of new stocks, after pausing in the spring, swung into full gear late this year, with last week notching two local megadeals: Airbnb, which ended its opening day on Thursday worth more than $ 100 billion, and DoorDash, which closed Wednesday worth $ 72 billion.
This year, 91 California companies have gone public, raising about $ 40 billion and starting their opening days as publicly traded companies collectively worth $ 166.3 billion, according to data from Dealogic. That’s almost double the number of California initial public offerings in 2019 or 2018 — and there are still more on tap for this year.
The state didn’t anticipate the market’s swift recovery or the Wall Street gold rush.
“Our capital gains forecasts was fairly low,” Palmer said. That means the gonzo activity from recent months will boost the next budget projection due out with with the governor’s budget in January. “The market outperformed what we expected, which is good.”
While the impact from each company is different, the state can point to some specifics that it gleans by combing through regulatory filings that detail how much stock executives and insiders have. When Uber went public last year, it yielded about $ 200 million for the state. Facebook’s landmark offering in 2012 resulted in about $ 1.3 billion for California over several years, mainly because CEO Mark Zuckerberg had a phenomenal amount of income from selling shares.
Taxes on stock gains are one reason California’s economy has such a boomandbust trajectory. The state now tries to moderate that volatility by socking away excess capitalgains taxes into a rainyday fund.
Some of the surplus could also go into restocking reserves.
State tax benefits don’t just come when the lockup period expires. If a company continues to do well on Wall Street and its employees, executives and investors continue to sell stock, California will continue to benefit.
“It’s not just a series of oneoffs,” Palmer said. “What you hope for is something that is an ongoing phenomenon.” That’s certainly been the case with Facebook, Google and Apple.
Currently, San Francisco benefits directly from stock offerings because of its 0.38% payroll tax. Companies must pay that amount when their employees exercise stock options. In 2019, the city estimated it would reap between $ 15.1 million and $ 43.5 million from payroll taxes on stockbased compensation, according to a report.
That approach will change in 2021 because of Proposition F, which eliminates the payroll tax and instead raises the gross receipts tax. “No one will pay payroll tax, including IPO companies, as of Jan. 1,” said Ted Egan, San Francisco chief economist.
However, increased stockbased compensation still could boost what the city realizes from the gross receipts tax, he said. San Francisco uses payroll expenses incurred in the city to apportion that tax.
“If executives are based in San Francisco and they are getting a bigger share of the stockbased compensation than lowerpaid employees who work in other cities, that will tend to raise the apportion factor for that year,” Egan said.
For example, a global company that has about 5% of its staff in San Francisco — including executives who reap stock bonanzas — might see its San Francisco payroll rise to 10% of overall payroll due to stock cashouts.
San Francisco also calculated initial public offerings’ impact on real estate and found it to be modest. In 2019, the flood of stockbased compensation may have raised the price of a single unit of housing between $ 7,245 and $ 25,005 — not much when the median price was $ 1.35 million. Its impact on rents, which were at a median of $ 4,393, was from $ 24 to $ 81 a month.
“IPOs are like earthquakes,” Palmer said. “There’s always an amount of seismic activity in California as part of the background noise. There are always a certain amount of IPOs going on because of the nature of our innovative and dynamic economy. But like an earthquake, the bigger IPOs are the ones that tend to get the attention. And they trigger unusually large amounts of compensation. Then that compensation is taxable in California.”