Tech IPOs could be windfall for California budget(marketwatch.com)
marketwatch.com
Tech IPOs could be windfall for California budget
https://www.marketwatch.com/story/tech-ipos-could-be-windfall-for-california-budget-2019-03-31
24 comments
This seems like an interesting moment for the state to invest in infrastructure. Perhaps there is a way to redistribute some wealth for societal progress.
Don't forget a big reason CA has a vibrant tech culture is because of it does not allow Non Competes. You pay something but you get something in return.
Let’s build the planned Caltrain tunnel into downtown SF and BART tunnel into downtown SJ so the impact on the housing market is distributed more widely and people from more backgrounds can afford to commute to these centers of economic growth. And let’s legalize the construction of high-rises within 1 mile of any BART or Caltrain station and invest in increasing the frequency and hours of the trains.
Please run for office because this sounds great. Maybe throw something in about repealing prop 13 too.
If you know you are about to receive a huge windfall of life changing amounts of money why wouldn't you move to a income tax free state 6 months ahead of time?
Some people absolutely do, but most do not because the trade-off isn't worth it. I know friends of friends who have done so, but they are the exception.
Most people who will be making substantial sums from an IPO, and therefore stand to gain substantially by minimising taxes, likely live comfortably in the area. They may have a strong community of friends and family here, well developed hobbies here, enjoy the benefits of living in California, etc.
Most people who will make that much money from an IPO likely want to be in a position to make new moves, take on new opportunities, and will want to be in the ecosystem where they can take on meaningful challenges. Establishing a new network in a new geography takes time, and there aren't that many great geographies to do so. Only a handful of states have no cap gains tax, so your options are pretty limited, though states like Texas or Washington could be good new starting places.
Most people who will be making substantial sums from an IPO, and therefore stand to gain substantially by minimising taxes, likely live comfortably in the area. They may have a strong community of friends and family here, well developed hobbies here, enjoy the benefits of living in California, etc.
Most people who will make that much money from an IPO likely want to be in a position to make new moves, take on new opportunities, and will want to be in the ecosystem where they can take on meaningful challenges. Establishing a new network in a new geography takes time, and there aren't that many great geographies to do so. Only a handful of states have no cap gains tax, so your options are pretty limited, though states like Texas or Washington could be good new starting places.
Your team is located in San Francisco and is iffy about remote work and the last thing you want to do is jeopardize your job or performance-based compensation by ditching at this key time for the company.
There's some competing priorities. If you move, chances are you're leaving the job, which you might like, and the job market (yes, other markets exist, but they're not the same). That may mean missing out on future vesting.
If you're vesting non-quals or RSUs after the IPO, California is going to tax you on some portion of it anyway, so that makes it harder to stick it to the (California) man.
It takes time to make a move, if you haven't already thought about moving to places that happen to be tax free.
At the same time, diversifying sooner is definitely worth paying CA tax for. I'd rather pay 13% (or whatever) or $$$$ than 0% of $$$.
Anyway, the right thing to do tax wise is somehow get your shares into a roth account while they're not worth much... Then we they become worth a lot, you can diversify without a tax penalty, and you can setup a 'substantiallly equal periodic payment' plan to access the earnings.
If you're vesting non-quals or RSUs after the IPO, California is going to tax you on some portion of it anyway, so that makes it harder to stick it to the (California) man.
It takes time to make a move, if you haven't already thought about moving to places that happen to be tax free.
At the same time, diversifying sooner is definitely worth paying CA tax for. I'd rather pay 13% (or whatever) or $$$$ than 0% of $$$.
Anyway, the right thing to do tax wise is somehow get your shares into a roth account while they're not worth much... Then we they become worth a lot, you can diversify without a tax penalty, and you can setup a 'substantiallly equal periodic payment' plan to access the earnings.
Out of principle? There were three founders at one company I worked at. At the time of the IPO one had already moved out-of-state for unrelated reasons, one moved to Texas to avoid taxes, and the other stayed here partly out of principle. (There were already many remote engineers and even upper management--I think the head of product development had moved to Utah long before.)
Of the one who moved to Texas, the opinion of most people in the company, including of the other two founders, was that it was a pretty rotten move. But for the social and legal culture of Silicon Valley and California, such success--particularly the magnitude of success--would have been unlikely.
I doubt he cared, though. And to be fair to him, he wasn't a loathsome person, nor even an anti-government, Peter Thiel type personality. Otherwise socially responsible people can rationalize bad behavior, especially when its in their own self-interest. But it's not automatic.
Of the one who moved to Texas, the opinion of most people in the company, including of the other two founders, was that it was a pretty rotten move. But for the social and legal culture of Silicon Valley and California, such success--particularly the magnitude of success--would have been unlikely.
I doubt he cared, though. And to be fair to him, he wasn't a loathsome person, nor even an anti-government, Peter Thiel type personality. Otherwise socially responsible people can rationalize bad behavior, especially when its in their own self-interest. But it's not automatic.
If principal is your thing why not take the tax difference and appropriate the funds by donating to your principal causes?
If you want low taxes and little government regulation why not move to a banana republic?[1] The answer is because we don't live in a vacuum--policies matter, otherwise you're just pissing into the wind.
The entire purpose of government is to overcome the free rider problem. If you can't rely on people acting in the same socially responsible manner, then doing it alone (especially at scale) is not only fruitless, it can be outright counterproductive. Coordination of socially responsible behavior is a mixture of social, political, legal, and cultural (e.g. religious) norms. In a diverse society the political and legals components are particularly important.
[1] That's not an entirely rhetorical question. I've met people in South America who have done exactly this. One was a gold standard proponent who found some success in Ecuador as a real estate broker and manager for expat investors. Another was roaming around some pretty sketchy areas of Venezuela, Columbia, and Ecuador looking for a place to settle--his wife got tired of his anti-Bush, anti-Obama rants, called his bluff and told him to go figure things out and call her when he found a place to settle. Those two left the U.S. specifically because of their libertarian political beliefs. I've met many others with more mixed motivations.
EDIT: I respect those two for leaving. Remember, Socrates chose death over leaving Athens, but was he trying to make a particular point. Exile was nonetheless an ethically acceptable option, too. What's not ethically acceptable is staying and skirting the rules. The analogous acceptable behavior in this case would be moving to Texas to make your point but paying your California taxes on the IPO as the ethically responsible thing.
The entire purpose of government is to overcome the free rider problem. If you can't rely on people acting in the same socially responsible manner, then doing it alone (especially at scale) is not only fruitless, it can be outright counterproductive. Coordination of socially responsible behavior is a mixture of social, political, legal, and cultural (e.g. religious) norms. In a diverse society the political and legals components are particularly important.
[1] That's not an entirely rhetorical question. I've met people in South America who have done exactly this. One was a gold standard proponent who found some success in Ecuador as a real estate broker and manager for expat investors. Another was roaming around some pretty sketchy areas of Venezuela, Columbia, and Ecuador looking for a place to settle--his wife got tired of his anti-Bush, anti-Obama rants, called his bluff and told him to go figure things out and call her when he found a place to settle. Those two left the U.S. specifically because of their libertarian political beliefs. I've met many others with more mixed motivations.
EDIT: I respect those two for leaving. Remember, Socrates chose death over leaving Athens, but was he trying to make a particular point. Exile was nonetheless an ethically acceptable option, too. What's not ethically acceptable is staying and skirting the rules. The analogous acceptable behavior in this case would be moving to Texas to make your point but paying your California taxes on the IPO as the ethically responsible thing.
> The entire purpose of government is to overcome the free rider problem.
Can you expand on this?
The U.S. was founded by people who fled to find reprieve from taxes and a government that you could describe as a"free loader".
Can you expand on this?
The U.S. was founded by people who fled to find reprieve from taxes and a government that you could describe as a"free loader".
Most colonists fled religious persecution or were seeking economic opportunity, and in some cases were moving to a place with more onerous taxes.
The founding of independent government was about political self-determination. It most assuredly was not anti-tax. Nowhere in the newfound state governments was taxation limited; rather, AFAIU in all the new states the power to tax given to the legislature was absolute and unlimited! Federal taxation was limited, but that was out of concern for preserving the self-determination of each individual state.
The guiding principle behind early American politics was that representative democracy was sufficient to constrain unfair taxation. In fact, the inability of the federal government to fund itself through direct taxation of the people, instead having to rely on funding from state governments which it could not compel, is one of the most important reasons the Articles of Confederation were deemed a failure. The new U.S. Constitution conspicuously granted the new federal government direct taxation powers.
I think many people today, both liberal and conservative, would agree that the Founders' ideas about taxation were too simplistic. Conservatives might want more structural limitations, and liberals might want rules about distribution. But the Founders were definitely not anti-taxation. Early Americans weren't, "No taxation!" They were, "No taxation without representation!"
The founding of independent government was about political self-determination. It most assuredly was not anti-tax. Nowhere in the newfound state governments was taxation limited; rather, AFAIU in all the new states the power to tax given to the legislature was absolute and unlimited! Federal taxation was limited, but that was out of concern for preserving the self-determination of each individual state.
The guiding principle behind early American politics was that representative democracy was sufficient to constrain unfair taxation. In fact, the inability of the federal government to fund itself through direct taxation of the people, instead having to rely on funding from state governments which it could not compel, is one of the most important reasons the Articles of Confederation were deemed a failure. The new U.S. Constitution conspicuously granted the new federal government direct taxation powers.
I think many people today, both liberal and conservative, would agree that the Founders' ideas about taxation were too simplistic. Conservatives might want more structural limitations, and liberals might want rules about distribution. But the Founders were definitely not anti-taxation. Early Americans weren't, "No taxation!" They were, "No taxation without representation!"
I'm a non-US citizen who moved to San Francisco to work for a startup. I left that job (and the US) many years ago, but that startup is now a unicorn, and they're very close to an IPO.
I believe that if I become a tax resident in Hong Kong, Singapore, Belgium, etc. then I won't need to pay any capital gains tax when I sell my shares. I've heard that California will go after people who try to move to other states to avoid CGT, but I don't know if that applies to non-US citizens who have left the country. (Please let me know if you can recommend a good international tax expert.)
I've been living in many different countries since I left the US, so I don't have any strong ties to any specific countries (not even my home country). My shares could be worth about $5M after the IPO. If I wanted to sell most of them and buy VTSAX, then I might end up with a tax bill of $1.5M if I happened to live in a country with a 30% CGT (or if capital gains are treated the same as income.)
I don't think it's unethical for me to become a tax resident in some country with no capital gains tax. The alternative is paying a huge amount of money to some random country just because I happened to live there over 183 days.
I wouldn't mind moving back to California and paying the tax like everyone else, but it's impossible. There's no visa for people who do freelance work while building a bootstrapped startup. Even if I wanted to go back to a full-time job, it's extremely difficult to get an H-1B or O-1 visa. My startup would need to have at least $100k in ARR before I meet the salary requirements for an H-1B visa. I'd also need to take some investment so that my investors could be on the board and sponsor my H-1B application. My company is already making $50K ARR. I enjoy being independent and going at my own pace, so I don't really need any investors. (EDIT: I just learned about the E-2 and L-1A visas. I might look into those.)
If I was still living in California after the IPO, I might end up paying $1M+ in LTCG tax when I sell my shares. I would be very happy to pay this if I could move back now, get a green card, and work on my own company. I guess California and the federal government would be making a bet based on the likelihood of an IPO, which is still nowhere near guaranteed. This is also an extremely rare situation which only applies to a handful of people. But it would be nice if I could get a green card if I promised to live in the US and pay these taxes.
The other option is to just live in Hong Kong for > 6 months, sell my shares, and pay $0 in capital gains tax. Then I can move to the US on an EB-5 visa, which only costs $500k.
I believe that if I become a tax resident in Hong Kong, Singapore, Belgium, etc. then I won't need to pay any capital gains tax when I sell my shares. I've heard that California will go after people who try to move to other states to avoid CGT, but I don't know if that applies to non-US citizens who have left the country. (Please let me know if you can recommend a good international tax expert.)
I've been living in many different countries since I left the US, so I don't have any strong ties to any specific countries (not even my home country). My shares could be worth about $5M after the IPO. If I wanted to sell most of them and buy VTSAX, then I might end up with a tax bill of $1.5M if I happened to live in a country with a 30% CGT (or if capital gains are treated the same as income.)
I don't think it's unethical for me to become a tax resident in some country with no capital gains tax. The alternative is paying a huge amount of money to some random country just because I happened to live there over 183 days.
I wouldn't mind moving back to California and paying the tax like everyone else, but it's impossible. There's no visa for people who do freelance work while building a bootstrapped startup. Even if I wanted to go back to a full-time job, it's extremely difficult to get an H-1B or O-1 visa. My startup would need to have at least $100k in ARR before I meet the salary requirements for an H-1B visa. I'd also need to take some investment so that my investors could be on the board and sponsor my H-1B application. My company is already making $50K ARR. I enjoy being independent and going at my own pace, so I don't really need any investors. (EDIT: I just learned about the E-2 and L-1A visas. I might look into those.)
If I was still living in California after the IPO, I might end up paying $1M+ in LTCG tax when I sell my shares. I would be very happy to pay this if I could move back now, get a green card, and work on my own company. I guess California and the federal government would be making a bet based on the likelihood of an IPO, which is still nowhere near guaranteed. This is also an extremely rare situation which only applies to a handful of people. But it would be nice if I could get a green card if I promised to live in the US and pay these taxes.
The other option is to just live in Hong Kong for > 6 months, sell my shares, and pay $0 in capital gains tax. Then I can move to the US on an EB-5 visa, which only costs $500k.
Countries with no capital gains taxes (on account of capital, not income): New Zealand, Singapore, Hong Kong, Malaysia, Switzerland. There's others, of course.
New Zealand would be great, but I heard that there are some separate rules for foreign shares. Or is that only for dividends? I need to learn more about that. I saw on this Quora answer [1] that I would need to pay tax on an assumed 5% dividend each year. So if I was holding $5M in shares, then I'd have to pay tax on an assumed dividend income of $250K. But I think there are also exceptions for startups that haven't gone public yet.
Are you available for a consultation?
[1] https://www.quora.com/Im-from-New-Zealand-but-I-own-a-lot-of...
Are you available for a consultation?
[1] https://www.quora.com/Im-from-New-Zealand-but-I-own-a-lot-of...
Maybe we should think about some high speed rail options!
It will all be spent, nothing will improve, and a few people will get rich. Guaranteed.
Governor Newsom is more fiscally responsible than most. It will be more difficult for him than Governor Brown to say, "No". Newsom commands less respect, and has less experience, than Brown. But don't forget that Newsom was Governor of San Francisco during the Great Recession, and San Francisco was the only large city in the state to maintain a balanced budget. Part of that was a pre-existing mandate that SF maintain a rainy day fund; but part of it was Newsom's City Hall extracting major concessions from unions and interest groups, shrinking expenditures. And SF wasn't as filthy rich as it is now. The big migration of tech from South Bay to the city didn't really get moving until about 2011.
"San Francisco is officially $10 billion in the hole"
https://www.sfexaminer.com/news/san-francisco-is-officially-...
https://www.sfexaminer.com/news/san-francisco-is-officially-...
This is mostly the result of (a) voter-mandated, retroactive benefit increases and (b) courts forbidding the city (and voters) from rolling back those retroactive increases. See
https://calpensions.com/2017/07/03/san-francisco-pension-deb...
The following case relates to just one particular benefits measure:
https://www.sfexaminer.com/news/sf-loses-lawsuit-against-may...
City leadership itself has been relatively fiscally responsible. For example,
https://www.sfchronicle.com/bayarea/article/SF-taking-steps-...
Which is actually quite impressive, IMO, because the pressures to spend are enormous, and the city does indeed spend quite a lot. The politics at the Board of Supervisors is intense and there's a large populist faction that would like to spend much more. But at the end of the day what really matters is who is elected to City Hall, and at least when it comes to fiscal responsibility Newsom, Lee, and now Breed put a strong emphasis on long-term budget viability. But sometimes--like with voter-mandated expenditures--their hands are tied. Mayor Breed opposed the recent Prop C which raised several hundred million in new revenue for spending on homelessness. (She supported a similar future ballot measure, but wanted to wait things out. Working under Mayor Lee she already had a sense of what was in the pipeline and wanted to see how those initiatives developed. And Lee and others were expecting another downturn very soon so were more concerned with shoring up the budget to avoid having to make deep cuts.)
EDIT: Also, the growth in healthcare costs is eating everybody alive. What should really worry people is whether California voters mandate single payer. Because California is limited in how it can control cost growth--most policy control resides in Washington, e.g. pharmaceutical regulation--it'll be a huge problem. But we won't be able to blame politicians for it.
https://calpensions.com/2017/07/03/san-francisco-pension-deb...
The following case relates to just one particular benefits measure:
https://www.sfexaminer.com/news/sf-loses-lawsuit-against-may...
City leadership itself has been relatively fiscally responsible. For example,
https://www.sfchronicle.com/bayarea/article/SF-taking-steps-...
Which is actually quite impressive, IMO, because the pressures to spend are enormous, and the city does indeed spend quite a lot. The politics at the Board of Supervisors is intense and there's a large populist faction that would like to spend much more. But at the end of the day what really matters is who is elected to City Hall, and at least when it comes to fiscal responsibility Newsom, Lee, and now Breed put a strong emphasis on long-term budget viability. But sometimes--like with voter-mandated expenditures--their hands are tied. Mayor Breed opposed the recent Prop C which raised several hundred million in new revenue for spending on homelessness. (She supported a similar future ballot measure, but wanted to wait things out. Working under Mayor Lee she already had a sense of what was in the pipeline and wanted to see how those initiatives developed. And Lee and others were expecting another downturn very soon so were more concerned with shoring up the budget to avoid having to make deep cuts.)
EDIT: Also, the growth in healthcare costs is eating everybody alive. What should really worry people is whether California voters mandate single payer. Because California is limited in how it can control cost growth--most policy control resides in Washington, e.g. pharmaceutical regulation--it'll be a huge problem. But we won't be able to blame politicians for it.
Calling these "voter mandated" is a serious stretch. It was the government agencies who put them on the ballots (as opposed to any voter initiative/petitioning), and it was those same government agencies who utterly lied about the fiscal effects in the ballot statements, as detailed in your own link. Quoting:
'The grand jury suggests voters may have been misled by official ballot pamphlet cost information on two of the three “significant” pension increases described in the report. A dozen retroactive retirement benefit increases between 1996 and 2008 are listed in a report appendix.
Voters were told that even with a retroactive pension increase for most employees (Proposition C in 2000) the city is not expected to make an annual payment to the retirement system “for at least the next 15 years.”
The eight-year period with no annual city payment to the retirement system, known as a “contribution holiday,” ended in 2004.
For a police and firefighter pension increase (Proposition H in 2002) voters were told that with a “large surplus” city contributions should not be needed for at least 10 years — but if needed, police and firefighters would pay “all or part” of the added cost.'
'The grand jury suggests voters may have been misled by official ballot pamphlet cost information on two of the three “significant” pension increases described in the report. A dozen retroactive retirement benefit increases between 1996 and 2008 are listed in a report appendix.
Voters were told that even with a retroactive pension increase for most employees (Proposition C in 2000) the city is not expected to make an annual payment to the retirement system “for at least the next 15 years.”
The eight-year period with no annual city payment to the retirement system, known as a “contribution holiday,” ended in 2004.
For a police and firefighter pension increase (Proposition H in 2002) voters were told that with a “large surplus” city contributions should not be needed for at least 10 years — but if needed, police and firefighters would pay “all or part” of the added cost.'