Why California’s AI IPO Tax Windfall May Fall Short

California’s budget planners have been eyeing a historic payday from the upcoming IPOs of SpaceX, OpenAI, and Anthropic, three of the most valuable private companies in the world. With SpaceX now valued at an eye-popping $2.5 trillion and both AI firms expected to debut at nearly $1 trillion each, the state should be bracing for the largest tax windfall from stock listings in its history. The reality, however, is far less straightforward.

When Facebook went public in 2012 at a $104 billion valuation, California collected $1.3 billion in taxes. Simple arithmetic suggests that a company worth 10 to 25 times that amount should generate proportionally more revenue. But the rules of compensation have shifted, and employees now have sophisticated tools to shrink their tax bills long before an IPO day arrives.

One major change is how companies structure equity. Most startups issue dual-trigger restricted stock units (RSUs), which vest only when two conditions are met: the employee stays with the company and a liquidity event, like an IPO, occurs. That creates a massive, concentrated taxable event on the day of the listing. SpaceX, however, uses single-trigger RSUs, where shares vest based on employment alone. Many employees have already been paying income taxes on those shares for years, pulling the revenue forward and making it far less predictable.

The California Legislative Analyst’s Office has acknowledged this challenge, noting that estimating the tax impact from SpaceX is “challenging.” According to the LAO, “Revenue totals will depend more on financial decisions made by employees and investors who hold pre-IPO SpaceX shares and stock options. Relative to past IPOs, tax revenues from the SpaceX IPO are likely to be less immediate and more unpredictable.”

Tender offers have also drained the pool. OpenAI conducted a $6.6 billion secondary share sale at a $500 billion valuation and plans another at $852 billion. Employees at all three companies have had ample opportunity to sell pre-IPO shares. Those gains were taxed, but the revenue arrived before the IPO, not on the day regulators plan for.

Perhaps the biggest structural leak is the “buy, borrow, die” strategy. Instead of selling shares and paying capital gains tax, shareholders take loans against their stock. They pay interest instead of taxes, stay invested, and benefit from future appreciation. Elon Musk has famously used this approach, borrowing against billions in Tesla shares rather than selling them. A cottage industry of wealth managers, donor-advised funds, and financial advisors now makes these tools available to ordinary employees, not just founders.

“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,” said Richard Lowry of Cresset. “Now there is a cottage industry around allowing people to avail themselves of this.”

California’s Franchise Tax Board is “notoriously aggressive” in auditing, according to tax analyst Robert Willens. The state will still collect significant revenue from the vesting of RSUs. But the windfall will be spread over years rather than arriving in a single quarter, and the most sophisticated shareholders will reduce their bills substantially. Anthropic and OpenAI have both filed confidentially, and their listings could still be delayed by market conditions. For California’s budget planners, the AI IPO windfall is real but unpredictable, large but less concentrated, and far more diffuse than the Facebook precedent suggests.