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view archive Internet giant Google's stock has soared since it went public almost two years ago -- and that has created a windfall for state government coffers. It's almost certain that a significant chunk of April's haul came from Google employees -- perhaps one-eighth or more of the tax receipt gain. The fact that a single high-flying Silicon Valley company is giving such a big boost to the state treasury can be determined by examining insider stock trading information filed with the Securities and Exchange Commission. Many lower-level Google employees also sold stock in their company last year. We don't know how much tax this group paid, but it clearly lifted the state's total take from Google well above the $450 million figure. It's not clear exactly when the Google insiders paid their tax bills. It's possible they made estimated state-tax payments last year when they sold the stock. In that case, their tax payments would not be included in April's state-tax haul. But it's much more likely that they paid all or some of their capital gains tax in April when they filed their 2005 tax returns or requested an extension. What we do know is that the Franchise Tax Board received a lot of very large checks with extension requests last month, says Brad Williams, director of fiscal forecasting with the state legislative analyst's office. "We did get a little information from the Franchise Tax Board about where the biggest payments were coming from, and a lot were coming from Silicon Valley, the San Francisco area. That tends to suggest it is sales of stock, maybe by founders of companies, people with large numbers of shares," Williams says. Tech stocks had a good year in 2005, and insiders at lots of companies cashed in options and sold shares. But their gains were dwarfed by the fortunes made by Google insiders. Google alone accounted for almost half of the 2005 total. The Google founders still own the vast majority of their shares, which means they could make more contributions to the tax kitty if they decide to diversify their holdings and the company's stock price holds up. But it is risky for a state to rely on capital gains taxes, and April's big payoff doesn't mean that the state can count on Google bolstering the budget indefinitely. In the late 1990s, taxes on capital gains and stock options started flooding into the state treasury. Thinking those gains would last, the state embarked on a spending spree. But stock-market income fell off a cliff after early 2000. Capital gains from Google and other companies aren't the only factors behind the surge in tax receipts. Another likely source of April's tax take, which could be less volatile than stock-based capital gains, is real estate. Most of those gains came from the sale of rental property and second homes, but they also included the taxable portion of capital gains on the sale of primary residences. If real estate capital gains grew at the same rate in 2005 as they did the previous year, they could have reached $25 billion in 2004. Again, a good portion of those gains could have showed up in the April tax figure. Real estate gains "are more widely distributed" than stock market gains, says Williams. "You're not depending on a handful of people making decisions about huge stock sales. You're talking about a large number of people making individual decisions. However, it is subject to conditions in the real estate market, and right now we're worried about a real estate bubble and what it will mean for both the volume of transactions and the rate of appreciation." Small businesses could have accounted for another portion of the April surprise. Many companies that do business as sole proprietors, partnerships or limited liability corporations report their business income on their personal income tax returns. We knew that going in, but they may have been even better than we thought," says Williams. California is not the only state with burgeoning tax coffers. "The surge is being seen by many states," especially those that -- like California -- have rising property values and progressive tax structures, says Tim Blake, a senior municipal-debt analyst with Moody's Investors Service. Federal-tax revenues are also coming in much stronger than expected, a large part of the increase coming from capital gains and business profits. "High-income taxpayers are doing better than low-income taxpayers, generally," says Blake. California's tax structure is highly progressive, which makes it highly volatile. For the 2004 tax year, 38,000 California tax returns reported more than $1 million in income. They represented just 02 percent of all state-tax returns, yet they accounted for 14 percent of total adjusted gross income and about 30 percent of the total personal tax. The top 3 percent of the returns, those with incomes exceeding $200,000, paid about 60 percent of all state taxes. "What happens to the top 1 percent is of great interest to the Department of Finance," says David Hitchcock, a debt analyst with Standard & Poor's.
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