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As California becomes more dependent on tax revenue from the tech industry, its stake in the health of the AI industry is growing.
The state is seeing financial benefits from the AI boom, a new analysis from the Legislative Analyst’s Office shows. But the boom raises questions: Will it continue to be accompanied by a decline in tech and other jobs? Is it a balloon?
Tax revenue from withholding taxes on stocks paid by some of the state’s largest technology companies will make up about 10 percent of all income taxes withheld in 2025, estimated Chas Alamo, chief fiscal and policy analyst at the LAO. Alamo looked at tech companies’ public financial filings and other data through the second quarter of 2025. That figure will be roughly the same as in 2024, and is up from more than 6% just three years ago. when you first did the analysis.
The largest source of government revenue is personal income tax. It is common for technology companies to pay their employees stock options in addition to their base salaries. Stock options that are granted and wholly owned by employees are treated as ordinary income for tax purposes, so companies pay withholding taxes on a portion of that income to the state and U.S. governments.
Shining a spotlight on where the state’s tax revenue comes from is especially timely when it needs all the revenue it can get. California is expected to have budget deficit of nearly 18 billion dollars this year, with the state expecting to have to fill funding holes due to cuts by the Trump administration. But the state’s growing reliance on AI-driven revenue is risky for two reasons: concerns that the technology is overhyped, and because the rise of AI threatens livelihoods.
Alamo based its analysis for the performance of the five most valuable technology companies in the country by market value: Apple, Google, Nvidia, Broadcom and Meta. Shares of Nvidia, Broadcom and Google have performed particularly well in 2025: they are up 25%, 46% and 59% for the year, respectively. Alamo also included Intel, Cisco, AMD, Intuit, Paypal, Applied Materials and Qualcomm in its analysis because they paid significant amounts of withholding on stock options to their employees.
“We’re seeing a real boost in income tax revenue because of this — for a relatively small number of employees,” Alamo told CalMatters. “If the AI market deteriorates, we could see those deductions go down.”
In other words, if the AI bubble bursts, California could see a sharp drop in tax revenue. That’s because there’s been little job growth and wages aren’t rising, Alamo said, adding that the analyst’s office has expressed concern about the “stagnant nature of the state’s labor market and the overall economy” over the past few years. In September, according to the most recent data available, California’s unemployment rate rose to 5.6 percent, the highest among US states.
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"AI doesn't win jobs"
Despite the AI boom, the number of tech jobs in the Bay Area actually declined from September 2024 to August 2025, according to the latest analysis by the Bay Area Council Economic Institute, a think tank supported by the Bay Area Council, a business coalition. Jobs in the information industry fell 1.3% over the period, while jobs in professional and business services fell 1.5%. Some technology companies, such as San Francisco-based Salesforce, mentioned AI as a factor when they revealed layoffs of thousands of employees.
"Right now on the web, AI is not winning jobs," said Jeff Bellisario, executive director of the think tank. "The bigger question for us is if you put aside the valuation (of technology companies) and think about the number of people employed by those companies."
Another analysis of employment data by the information arm of the California Business Roundtable, the California Center for Jobs and the Economy, shows a loss of more than 130,000 high-tech jobs, including manufacturing jobs, in the first quarter of last year.
"Technology booms in the past led to employment booms," Bellisario said. "This doesn't feel like it."
There is no consensus on whether this tech boom will bust anytime soon. Some of the biggest AI optimists include Jensen Huang, chief executive of chipmaker Nvidia, who told investors in November: "There's been a lot of talk about an AI bubble. From our perspective, we're seeing something very different."
Another optimist is Dan Ives, a longtime technology analyst and managing director at Wedbush Securities.
“This is not a bubble,” he told CalMatters. "This is year 3 of an 8- to 10-year build for the AI revolution." Ives said AI could be huge for U.S. innovation, and that this moment in time reminds him "much more of a 1996 moment than a 1999 or 2000 moment."
Balloon back and forth
In the mid-1990s, the widespread adoption of personal computers and the advent of the graphical web browser paved the way for the dot-com boom and gave rise to companies such as Google, Netflix and PayPal. But by 2000 or so, after the founders of these companies made their fortunes, many other Internet companies went out of business -- some in spectacular flames, like Webvan or Pets.com.
There are signs today that there are too many startups in certain subsectors, according to analysts at PitchBook, which tracks public and private capital markets. Among those they mentioned in their 2026 outlook: AI healthcare scribes that automatically generate medical notes; air defense drones; game content development; bots for personal assistants; and more. Analysts warned investors that startups will really need to differentiate themselves to deliver value.
Researchers at Allianz Trade, the global insurance company, wrote in a November brief: "The financial market frenzy around AI shows classic signs of an asset bubble: widespread consensus, unproven valuations and returns at times divorced from earnings." The researchers also said they are seeing a lot of corporate spending on AI as concerns grow about tightening energy restrictions. AI is driving demand for data centers that are mains voltage.
Bubble debate aside, some tech-centric experts point out that California's reliance on AI means the state needs to help the sector succeed, for example by not over-regulating it.
"It's important to remember that California's social safety net depends on a healthy tech industry," said Caitlin Harger, an economist at the Chamber of Progress, a think tank funded by the tech industry. Financial cushion technology helps the state fund public sector jobs, health services, education, social services and more, Harger said.
California leads all states in attempts to regulate artificial intelligence and is expected to fight back against the president's recent executive order to develop federal laws around AI to replace state laws.
This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.