By Levi Sumagaysay, CalMatters. This story was originally published by CalMatters. Sign up for their newsletters.
As California becomes more dependent on tax revenue from the tech industry, its stake in the health of the artificial intelligence industry has grown.
The state is seeing financial benefits from the AI boom, a new analysis by 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 bubble?
Tax revenue from stock-option withholding paid by some of the state’s biggest tech companies made up about 10% of all income tax withholding in 2025, estimated Chas Alamo, the principal fiscal and policy analyst with the LAO. Alamo looked at tech companies’ public financial filings and other data through the second quarter of 2025. That figure would be about the same as 2024, and is up from more than 6% just three years ago, when he first did the analysis.
The state’s biggest source of revenue is personal income tax. It’s common for tech companies to pay employees in stock options in addition to their base wages. Stock options that have vested and are fully owned by employees are treated like ordinary income for tax purposes, so companies pay withholding taxes on some 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 a nearly $18 billion budget deficit this year, with the state expecting to have to fill funding gaps because of cuts by the Trump administration. But the state’s growing reliance on AI-driven revenue is risky for two reasons: fears that the technology is overhyped, and because AI’s rise threatens livelihoods.
Alamo based his analysis on the performance of the state’s five most valuable tech companies by market value: Apple, Google, Nvidia, Broadcom and Meta. Shares of Nvidia, Broadcom and Google did especially well in 2025: They rose 25%, 46% and 59% for the year, respectively. Alamo also included Intel, Cisco, AMD, Intuit, Paypal, Applied Materials and Qualcomm in his analysis because they paid substantial amounts of withholding on their employees’ stock options.
“We’re seeing a real boost to income-tax receipts because of this — for a relatively small number of employees,” Alamo told CalMatters. “If the AI market were to deteriorate, we could see these withholdings decline.”
In other words, if the AI bubble pops, California could see a steep drop in tax revenue. That’s because there has been little job growth and wages are not rising, Alamo said, adding that the analyst’s office has been raising its concern over “the stagnant nature of the state’s labor market and broader economy” for the past couple of years. In September, the most recent data available, California’s unemployment rate rose to 5.6%, the highest among U.S. states.
‘AI is not a job-gainer’
Despite the AI boom, the number of tech jobs in the Bay Area actually decreased 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 were down 1.3% over that period, while jobs in professional and business services fell 1.5%. Some tech companies, such as San Francisco-based Salesforce, mentioned AI as a factor when they disclosed layoffs of thousands of employees.
“Right now, on net, AI is not a job-gainer,” said Jeff Bellisario, executive director of the think tank. “The bigger question for us is, you put aside (tech companies’) valuation and think about the number of people employed in these companies.”
Another analysis of employment data by the California Business Roundtable’s information arm, the California Center for Jobs and the Economy, shows a loss of more than 130,000 jobs in high tech, including manufacturing jobs, through the first quarter of last year.
“Tech booms in the past have led to an employment boom,” Bellisario said. “This doesn’t feel like that.”
There’s no consensus about whether this tech boom is set to go bust anytime soon. Some of the biggest AI optimists include Jensen Huang, chief executive of chipmaker Nvidia, who told investors in November: “There has been a lot of talk about an AI bubble. From our vantage point, we see something very different.”
Another optimist is Dan Ives, longtime tech 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 buildout of 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.”
Bubble back-and-forth
In the mid-1990s, 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 shortly afterward, after the founders of those companies made their fortunes, many other internet companies had gone out of business — some in spectacular flameouts, such as Webvan or Pets.com.
Today, there are signs that there are too many startups in certain subsectors, according to analysts at PitchBook, which tracks public and private capital markets. Among the ones they mentioned in their 2026 outlook: AI scribes in health care, which automatically generate medical notes; aerial defense drones; content development in gaming; personal assistant bots; and more. The analysts warned investors that startups would really need to differentiate themselves to bring value.
Researchers for Allianz Trade, the global insurance company, wrote in a November brief: “The financial market frenzy over AI shows classic signs of an asset bubble: widespread consensus, unproven valuations and returns at times detached from earnings.” The researchers also said they were watching a lot of corporate spending on AI as concerns grow around tightening energy constraints. AI is driving demand for data centers, which are straining the electric grid.
Discussion about a bubble aside, some tech-friendly experts point out that California’s reliance on AI means the state should help the sector succeed, such as by not overregulating it.
“What’s important to remember is that California’s social safety net depends on a healthy tech industry, “ said Kaitlyn Harger, an economist for Chamber of Progress, a think tank funded by the tech industry. The financial cushion tech provides helps the state fund public-sector jobs, health services, education, social services and more, Harger said.
California leads all states in trying to regulate AI, and is expected to fight against the president’s recent executive order to develop federal laws around AI that would supersede state laws.
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.