California had anticipated a significant tax windfall from AI IPOs, but contemporary compensation frameworks might reduce the expected gains.

      California anticipated receiving billions from the IPOs of SpaceX, OpenAI, and Anthropic. However, mechanisms like single-trigger RSUs, tender offers, and loans against shares are diminishing the potential financial boost.

      SpaceX is currently valued at $2.5 trillion, with OpenAI and Anthropic expected to go public later this year at nearly $1 trillion each. Given that all three companies have a significant presence in California, the state was set to experience its largest IPO tax influx ever. Nevertheless, the actual outcome may be more complex.

      Facebook's 2012 IPO resulted in $1.3 billion in taxes for California based on a $104 billion valuation. Estimating the tax revenue from IPOs valued 10 to 25 times higher might imply proportionally greater returns. However, the compensation methods for tech employees have evolved, along with strategies to minimize tax liabilities.

      SpaceX employs an unconventional stock-pay structure for a private company. While most startups issue dual-trigger RSUs—where shares vest upon meeting two conditions, continued employment and a liquidity event like an IPO—many SpaceX employees have single-trigger RSUs, which vest based solely on employment. As a result, these employees have been paying income taxes on their shares for years, leading to an acceleration of tax revenue that complicates projections.

      According to the California Legislative Analyst’s Office, this structure makes it difficult to forecast SpaceX’s tax impact. The LAO noted that “revenue totals will depend more on financial decisions made by employees and investors who hold pre-IPO SpaceX shares and stock options,” indicating that tax revenue from SpaceX's IPO will likely be less immediate and more uncertain compared to previous IPOs.

      Additionally, tender offers have reduced the available tax pool. OpenAI conducted a $6.6 billion secondary share sale at a $500 billion valuation and is planning another at $852 billion. Employees across all three companies have had numerous chances to sell pre-IPO shares, which were taxed when sold, though the revenue was received prior to the IPO rather than on the anticipated date.

      The “buy, borrow, die” strategy represents a significant structural leakage. Rather than selling shares and incurring capital gains tax, shareholders take out loans against their stock. They pay interest instead of taxes, maintain their investments, and benefit from future value increases. Elon Musk has notably employed this tactic, borrowing against billions in Tesla shares instead of selling them. Now, a growing network of wealth managers, donor-advised funds, and financial advisors is making these options accessible to everyday employees in addition to founders.

      As Richard Lowry of Cresset observed, “Historically, the only people who had equity in a private company and were in a position to give it away were millionaire or billionaire founders." Now, there is a burgeoning industry enabling individuals to take advantage of these strategies.

      California's Franchise Tax Board is known for its rigorous auditing, as noted by tax analyst Robert Willens. The state will still gather substantial revenue from RSU vesting, but this windfall is likely to be spread out over several years instead of being concentrated in a single quarter, and more sophisticated shareholders will significantly reduce their tax liabilities. Both Anthropic and OpenAI have filed confidentially for their IPOs, and their market listings could be delayed by economic factors. For California’s budget planners, while the AI IPO windfall is substantial and real, it is also unpredictable and diffuse, contrasting sharply with the more concentrated revenue seen from Facebook's IPO.