California is getting a financial boost from an artificial intelligence boom, but analysts warn the state’s growing reliance on tech-related income could be volatile if the industry cools. The Legislative Analyst’s Office says tax revenue tied to stock-option withholding paid by major tech companies has risen as the AI market has expanded, even as questions persist about whether the labor-market effects match the revenue gains.
In an analysis discussed with CalMatters, Chas Alamo, the principal fiscal and policy analyst with the LAO, estimated that stock-option withholding made up about 10% of all income-tax withholding in 2025. Alamo said he based the figure on tech companies’ public financial filings and other data through the second quarter of 2025, and that the share would be about the same as 2024—while also noting it was above 6% just three years earlier.
The reporting describes how that tax base works in practice: California’s biggest revenue source is personal income tax, and many tech companies pay employees in stock options as well as wages. When stock options vest and are fully owned by employees, they are treated as ordinary income for tax purposes, and companies pay withholding taxes on some of that income to the state and the federal government.
The LAO’s spotlight comes as California faces budget stress. The story says the state is expected to have nearly a $18 billion budget deficit this year and expects to fill funding gaps because of cuts by President Donald Trump’s administration, making every revenue stream—including those linked to AI—especially consequential.
Alamo told CalMatters, “We’re seeing a real boost to income-tax receipts because of this — for a relatively small number of employees.” He added, “If the AI market were to deteriorate, we could see these withholdings decline.” The concern is that if an AI bubble bursts, California’s income-tax withholding could drop sharply because job growth has not kept pace with tech-company market gains.
The story ties that caution to broader employment conditions in California. Alamo said there has been little job growth and that wages are not rising, and he said the LAO has been raising 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 mentioned, California’s unemployment rate rose to 5.6%, the highest among U.S. states.
The labor-market picture in the Bay Area also complicates the idea that the AI boom is translating into widespread employment gains. The article says the Bay Area Council Economic Institute found that tech jobs in the region decreased from September 2024 to August 2025, including a 1.3% drop in information-industry jobs and a 1.5% decline in professional and business services jobs over that period.
Jeff Bellisario, executive director of the think tank, said, “Right now, on net, AI is not a job-gainer.” He described the “bigger question” as one of employment levels—“you put aside (tech companies’) valuation and think about the number of people employed in these companies.” Another analysis cited by the story from the California Business Roundtable’s information arm, the California Center for Jobs and the Economy, said California has lost more than 130,000 jobs in high tech, including manufacturing jobs, through the first quarter of last year, and Bellisario said, “Tech booms in the past have led to an employment boom,” while “This doesn’t feel like that.”
Still, the article says there is no consensus on whether the current AI-driven run is headed for a bust soon. The story points to AI optimists such as Nvidia Chief Executive Jensen Huang, 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.” It also cites Dan Ives, managing director at Wedbush Securities, who told CalMatters, “This is not a bubble,” adding that the period is “Year 3 of an eight- to 10-year buildout of the AI revolution,” and that the moment “much more of a 1996 moment than a 1999 or 2000 moment.”
The article describes an ongoing “bubble back-and-forth,” including historical parallels to the mid-1990s tech buildup and later dot-com failures. It also notes signs that some subsectors may be crowded, citing PitchBook research, and includes warnings from Allianz Trade. Allianz Trade researchers wrote in a November brief that the market frenzy shows “classic signs of an asset bubble: widespread consensus, unproven valuations and returns at times detached from earnings,” and said they were watching corporate spending as concerns grow around tightening energy constraints; the story adds that AI-driven demand for data centers is straining the electric grid.
Some California-focused voices argue that the state should support the industry’s expansion rather than treat it as a fleeting trend. The story quotes economist Kaitlyn Harger of Chamber of Progress saying, “What’s important to remember is that California’s social safety net depends on a healthy tech industry,” and that “The financial cushion tech provides helps the state fund public-sector jobs, health services, education, social services and more.” It also says California leads all states in trying to regulate AI and is expected to fight against a presidential executive order calling for federal laws around AI that would supersede state laws.