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Facebook's $12 Billion Gift to California?

In the budget revision released this week by California Governor Jerry Brown, there was only one thing to “like”—Facebook.

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"The biggest change in the California outlook stems from incorporating assumptions about the impact of the initial public offering of Facebook stock,” reads the Governor’s report. “It may turn out to be one of the largest initial public offerings in U.S. history and far larger than all of the recent offerings in the internet sector."

How large?

"The Facebook IPO could result in about $12 billion of additional income for California residents in the latter half of 2012."

Twelve. Billion. Dollars. Really?

The state income taxes on that alone would top $1.2 billion, enough to fill 7.5 percent of the current $16 billion deficit.

We called the Governor's office to see how it came up with that $12 billion number.

H.D. Palmer from the state's Department of Finance is basing the math on a share price of $35, which could end up being low.

Stock Options

Palmer says that based on Facebook's filing, there are 139 million options held by employees other than CEO Mark Zuckerberg and other investors. Those will net $3.8 billion, "assuming that 80 percent of these are exercised by California residents."

Vested Restricted Stock

There are 240 million vested restricted stock units that will be eligible for settlement by the end of the year. "Assuming that 80 percent of these are settled by California residents, they will net $6.7 billion."

Unvested Restricted Stock

There are 84 million shares of currently unvested restricted shares issued to employees eligible for settlement by the end of the year. "If 50 percent of these are settled by the end of the year and 80 percent are settled by California residents, they will yield $1.2 billion."

That all adds up to $11.7 billion.

Here’s the dilemma. This analysis assumes that 80 percent of the company’s more than 3,500 employees live in California. I’ve contacted Facebook to see if this is accurate.

More problematic, however, is the assumption that so many employees plan to cash out so much before the year is out.

Yes, there is a threat of a state income tax hike in 2013, but if all these workers exercised their stock options and sold billions in restricted stock as soon as they were allowed to, it would signal that insiders don’t have faith in Facebook.

In the long run, California would not “like” that at all.

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  • Based in Los Angeles, Jane Wells is a CNBC business news reporter and also writes the Funny Business blog for CNBC.com.

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