SACRAMENTO, California — California is riding the artificial intelligence wave to shore up its finances. But no one can agree on how big the surge will be — or when it will end.
As Gov. Gavin Newsom prepares to release his final state budget plan this week, his opening bid in negotiations with state lawmakers before a final deal is reached in June, he’ll have more cash on hand than he was expecting. Thanks largely to unchecked enthusiasm around soaring AI stocks, state coffers are projected to have at least $10 billion in tax revenue above what was predicted in January when the governor released an initial budget proposal.
Beyond the general fervor around AI, widely-anticipated initial public offerings for three giant AI companies — Anthropic, OpenAI and Elon Musk’s SpaceX — are expected to boost state revenues. The IPOs, which finance and tech experts expect to be the largest in history, could generate billions in additional state tax dollars.
“This is going to be galactically huge,” said Peter Leroe-Muñoz, general counsel for the business association Bay Area Council. “IPOs of this scale are rain in the desert for state and local finances.”
The stakes are enormously high for Newsom, a likely 2028 presidential contender who has been working for nearly eight years to demonstrate that he can expand government programs in the deep-blue state without breaking the bank. Now in his final year as governor, Newsom’s political fortunes are hitched to the tech sector as he relies on AI money to steady the state’s finances.
But two equally huge unknowns loom over the state’s projections: how much tax collectors will reap from the IPOs, and more existentially, whether California’s AI fever dream will break. The latter scenario would likely trigger a market downturn that could upend state finances, which depend heavily on tax income from its highest-earning residents.
“We're both going to say it's still a risk,” H.D. Palmer, a spokesperson for Newsom’s Department of Finance said when asked about the prospect of an AI-driven market downturn. “There's no question about it. But the question is, ‘What, based on that risk, do you then assume is a foregone conclusion?’”
Big money, big deficit
California’s reliance on high-income earners makes the state vulnerable to boom-and-bust cycles. In a span of four years, California went from a near-$100 billion surplus in 2022 — during the post-pandemic economic recovery — to projected annual deficits of at least $20 billion through the end of the decade. Costs are ballooning just to maintain existing programs and services for health care and schools, and the state’s revenues are not growing nearly at the rate that it is spending. Those problems have only been compounded by federal spending cuts enacted under President Donald Trump.
So California badly needs the infusion from AI IPOs. The initial burst of earnings that come with public offerings and then the ongoing stock trading could send more cash to the state for the next several years — a boon for Newsom in the run up to the 2028 campaign.
“It’s not just one-time good news,” said Chris Hoene, executive director of the California Budget and Policy Center, a left-leaning think tank. “The folks who get wealthy when these companies go public will continue to contribute to the state’s tax system in future years as well. So it’s both a near-term bump and a permanent increase.”
State budget experts largely agree that an AI-driven market downturn is coming, given that the stock market appears overvalued and that external factors like rising gas prices due to the war in Iran are driving up prices. Both the Department of Finance and the Legislative Analyst’s Office, a nonpartisan agency that advises lawmakers on fiscal matters, are watching for a potential bubble — though the LAO has been far more aggressive in factoring in a downturn into its projections.
But there’s disagreement about when the downturn will come.
“With such an unpredictable revenue stream, it is not possible to identify a single forecasting approach that is the best or most accurate,” said Brian Uhler, the state’s deputy legislative analyst. “Under these conditions, it should be expected that two groups of forecasters working independently to predict state revenues will occasionally have significant differences.”
Further, it’s not clear when OpenAI, Anthropic or SpaceX will go public. All three companies appear to be targeting initial offerings later this year, but only SpaceX has filed necessary documents to the Securities and Exchange Commission in preparation for an IPO. OpenAI or Anthropic could potentially delay their IPOs until 2027 in hopes of launching from a stronger financial position.
The inability to quantify how much tax revenue AI companies generate or know with certainty the results of a particular IPO means there is no consensus for how much tax revenue the state will receive. Palmer would only offer that a tech giant going public would “certainly not be a negative.”
A key unknown, Palmer said, is the extent to which employees are exercising their stock options ahead of the anticipated IPOs, which determines how much tax revenue is already in the state’s pipeline. Both SpaceX and OpenAI have reportedly offered current and former employees opportunities to sell shares ahead of their pending IPOs, but the state won’t have reliable data on the internal sales until SEC filings become public.
Similarly, the LAO “cannot reliably estimate the additional revenue that would arise from these IPOs this far in advance,” Uhler said. Once the companies go public, Uhler said that data on income tax withholdings would allow the agency to factor the revenues into its forecasts. Until then, he noted, major AI companies are not yet profitable and so are not paying much in state taxes.
Valuation game
One way to get an idea about how much the state stands to benefit is to look back to when Facebook first went public in 2012, an IPO which brought in just over $1 billion in tax revenue, according to Palmer.
Anthropic, OpenAI and SpaceX are expected to debut with valuations at or exceeding $1 trillion, which would dwarf Facebook’s valuation of around $100 billion when it first went public. SpaceX is seeking a whopping $1.75 trillion valuation in private documents the company filed last month to the SEC, according to Reuters, though California tax income from its IPO may be diminished because the company’s headquarters are in Texas.
“Even if OpenAI and Anthropic undershoot their respective valuations by even half, you're still at four times what the valuation of Facebook was,” Leroe-Muñoz said. “The numbers are just so astronomically large here.”
But the Finance Department was cautious to say whether the new class of California powerhouse companies will beat out the revenue windfall from Facebook’s debut. And Chris Thornberg, an economist with Beacon Economics and former director of the UC Riverside School of Business Center for Economic Forecasting, said that while Facebook succeeded, there were “a dozen other guys who went bankrupt or disappeared.”
“You can't pick out the winner and say that justifies the valuations for these 100 contestants,” Thornberg said. “So will one of these AI companies potentially be worth your current valuation? Sure. Does that mean the entire market should be valued like this? Absolutely not.”
Even if the companies do send a massive haul the state’s way, AI poses other financial complications. AI-induced layoffs could lead to rising unemployment, meaning people don’t spend as much, said Steven Levy, senior economist at the Center for Continuing Study of the California Economy. And because the state only generates revenue off capital gains taxes — when stocks are sold — it may not truly reap the benefits from the IPOs until next year.
“Stock market crashes happen,” Levy said. “AI is not a panacea in the short term. It’s going to take a long time for any positive impacts. Most of the short-term impacts are people getting laid off. So it’s not a one-way street.”
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