CAN STOCK MARKET CAPITAL GAINS TAX SAVE CALIFORNIA
Written by Chriss W. Street
The non-partisan Legislative Analyst Office (LAO) just reported that due to strong stock market capital gains from the “Trump Bump”, California for the first time since mid-2023 has a small budget surplus of $4.4 billion.
California tax revenues from personal income, corporate income and sales tax collections disastrously missed budget every month from mid-2023 to the run-up to the November 2024 elections. The LAO was forecasting that Governor Newsom would spend down the last $54 billion of state reserves and run up $30 billion annual deficits over each of the next three years.
But Donald Trump winning the presidency and Republicans capturing both houses of Congress,kicked-off the stock boom referred to as the “Trump Bump.” The boom is being led by Silicon Valley’s Magnificent 7 (Mag 7) tech stocks including: Apple; Microsoft; Google; Amazon; Nvidia; Tesla; and Meta Platforms (Facebook) that saw average stock prices leap by 15%.
California’s high-tech start-ups and development-stage companies partially pay employees in equity-pay-options. The percentage of equity-pay-options for big tech companies has risen over the last decade from 2%to 10% of total compensation.
As a result, tech companies trading at record stock prices are distributing record amounts of equity-pay-options at record option conversion prices. The tech companies pay regular California income tax withholding payments on the value of the equity-pay-options they give to employees. Employees then convert options to shares, sell stock, and pay California capital gains taxes on the premium the cost of the option.
At the end of October 2024, California budgeted personal income, corporate income and sales tax collections were down by about -$8 billion, or -4%. But with the Trump Bump adding +$12 billion of income tax collections since the election, the California state budget is now up +$4 billion, or +2%.
The LAO continues to caution that regular California income, corporate and sales tax revenues are still in a disastrous down-trend due to stagnant consumer spending, as a result of the worst job market in America.
U.S. stock market valuations are now near their all-time peak average multiple of 23 times forward earnings, which was the record at the peak of the of the Dot-Com Bubble in March 2000. But not only are the Mag 7 stocks now trading at over twice that record multiple, they represent an absolutely unheard of 50% of the entire value of the S&P 500 stock index.
When the Dot Com Bubble burst between 2000 and 2002, the tech-heavy Nasdaq Stock Index fell by76.81% from its peak, and the S&P 500 dropped by about 50%.
Coupled with shrinking personal income, corporate income and sales tax collections, a Mag 7 stock crash would lead to an existential crisis.