RPT-BREAKINGVIEWS-California and tech embrace one more knotty fling

By Robert Cyran

NEW YORK, June 24 (Reuters Breakingviews) - The uneasy partnership between California’s politicians and technology barons is based on mutual need. Taxes on capital gains help legislators balance the budget. Venture capitalists depend on the cluster of workers, firms and schools surrounding Silicon Valley. Both hope that the rise of artificial intelligence will shower them with wealth. Yet it could fatally weaken the relationship, too.

Half of the world’s ten most valuable companies – from iPhone maker Apple to Google owner Alphabet – are headquartered in California. Many now benefit from an AI gold rush, as investor hype lifts valuations to dizzying levels. San Francisco-based OpenAI, which helped spark the mania, is now valued at $300 billion. Thinking Machines Lab, founded by ex-OpenAI employee Mira Murati, just snagged $2 billion in funds at a $10 billion valuation, the Financial Times reported. It’s by far the largest seed round ever, according to Crunchbase.

The Golden State relies on these windfalls for the rich. About 60% of general revenue comes from personal income taxes, almost half of which are paid by the top 1% of earners. This cohort depends on capital gains that surge and tumble with the broader market. The AI boom is driving a new upswing: California expects to reap $6 billion more than originally projected this fiscal year.

Governor Gavin Newsom and legislators could use more. Lawmakers approved a preliminary $325 billion budget plan for the coming fiscal year. The two branches must now haggle over details, and how to best paper over a $12 billion budget gap. That hole is expected to grow in future years.

Raising tax rates seems a tough ask. California’s top earners pay two-thirds more of their family income in state and local levies than the U.S. average, according to the Institute of Taxation and Economic Policy. A boost from rising valuations therefore would be especially handy.

Investors backing the industry, like Andreessen Horowitz or Founders Fund, probably would prefer to keep their lucre. They can’t easily decamp, though. Yes, Tesla boss Elon Musk – after building a $1 trillion company – relocated to Texas. For venture capitalists seeking the next superstar founder, though, the density of engineers, programmers and specialized vendors is unparalleled outside of the Bay Area. They are further fed by top-flight institutions like Stanford University.

Yet the current AI boom is premised, at least partially, on automating much of this away. Programming is one of the jobs most at threat. Tech firms are laying off workers at a steady clip. If employment shrinks dramatically, so too will tax revenues – and, ultimately, the human and financial ties binding the industry and the state.

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CONTEXT NEWS

California’s legislature approved a preliminary $325 billion annual budget plan on June 13. However, work continues for lawmakers and governor Gavin Newsom to reconcile differing proposals on how to fill a $12 billion gap between projected revenue and expenditures.

The personal income tax is the state’s biggest revenue source, accounting for around 60% of general revenue for the state. The Governor’s Budget forecast projects capital gains realizations will reach 5.6% of personal income in 2025. Capital gains’ share of personal income in the state has ranged between 1.9% and 11.6% over the last 20 years.