Stock Options a Windfall for Workers, State Coffers

The volume of stock options cashed in by Californians has surged dramatically this year, providing a notable tax windfall to the state and helping to keep consumer spending unusually strong.

Based on payroll withholding taxes, the California Finance Department estimates that workers bolstered their pay by an additional $2 billion in the first quarter through stock options and, to a lesser extent, other bonuses.

That boosted total wages and salaries in California by about 1.5% for the quarter, and generated $200 million more personal income tax revenue than the state was expecting--a nice bump in a state budget of $60 billion.

And people are spending much of that $2 billion to remodel homes, take trips and make purchases--all of which is stimulating the state’s economy. Add to that billions of dollars that people are realizing in individual sales of stock and it illustrates the booming stock market’s increasingly powerful impact on the economy.

“It helps explain why consumer spending is so strong,” said Ted Gibson, chief economist at the Finance Department in Sacramento.

In addition to the extra income tax revenue, Gibson said sales tax revenues in the first quarter were running at about $126 million above projections, much of that also undoubtedly tied to the high-flying stock market.

Indeed, the unexpected surge in option payouts this year coincides with the market’s sharp gains. It also reflects the growing number of companies--notably high-tech but increasingly in other industries too--that are offering stock options to more and more of their workers.

Typically, companies give options on 100 or so shares of stock that workers can exercise, or cash in, after remaining at their jobs for a certain period of time. The option price is generally set at the time of the grant, so employees pocket any gain that has been achieved in the interim.

At least 7.5% of the top 1,000 publicly held companies nationwide--more than double the share three years ago--have made some grant of options or restricted stock to all employees, according to Executive Compensation Advisory Services in Virginia. The percent in California is thought to be much higher, given the state’s big share of high-tech companies and start-ups, which routinely offer stock options to their workers as incentives and in lieu of salary.

Just how many rank-and-file employees in California have benefited from such plans this year is unknown. Stock options are still mainly the purview of top management, and it’s likely that a relatively small number of executives received much of the $2 billion in option payouts reported to the state.

Public financial disclosures revealed, for example, that Amgen Chairman Gordon Binder benefited from options earlier this year as he sold stock worth about $13 million after shares in his Thousand Oaks-based biotechnology company burgeoned to record highs. His after-tax gains were not made public.

But there are also many more cases today of handsome stock option payouts for engineers, secretaries and other workers farther down the corporate ladder. More common, the options have come as a relatively small but still meaningful bonus for employees.

Howard Roth, a former economist and mid-level executive at Bank of America in Los Angeles, last month sold three blocks of options offered to him in recent years. Bank of America’s stock soared this year after plummeting in 1998, and Roth took home about $6,800 after taxes.

He says that will help pay for a third bedroom in his Orange County house that he has long thought about.

Employees in a variety of industries in California, from manufacturing to publishing, have been exercising their stock options this year, say brokers and company officials.

The flurry of stock option activity in the first quarter has been a relief to state officials, some of whom worried late last year about a possible budget shortfall in 1999. At the start of the year, the Finance Department was expecting an 8% to 9% increase in personal income tax revenues, based on projected job growth and wage gains. But those revenues rose 14%, with most of the increase explained by the extra $200 million that came largely from the stock options.

If this were to continue throughout the year--and that is a big if--the state would have significantly more funds than it anticipated. Although a tiny fraction of the state’s operating budget, the addition of several hundred million dollars can still make a big difference, especially for certain discretionary programs.

The last time state officials saw such a jump in personal income tax revenue was in the fourth quarter of 1992, when many top executives, including Disney’s Michael Eisner, rushed to exercise their options before tax rule changes proposed by then President-elect Clinton.

The personal income tax revenues do not include capital gains taxes that individuals must pay on the sale of stock. State officials say it is too early to know about revenue from capital gains taxes.

Certainly the big stock market gains in recent years have been boosting people’s incomes and government budgets. About 5% of California’s total personal income is now derived from capital gains, according to Gibson. That’s about $50 billion a year.

Assuming that the stock market continues to thrive, analysts say the steady rise in stock options for employees is likely to increase the stock market’s already substantial role in the economic life of government and workers.

The downside, of course, is if the stocks skid. “It can be a detriment to morale,” said David Leach, managing director of Compensation Resource Group in Pasadena.