Option income is in addition to capital gains on the sale of stock and other asset holdings, which although taxable, are by definition not included in personal income. As explained in the following section on revenues, these two income sources options and capital gains together account for more than one-fifth of General Fund revenues in the current fiscal year. Because stock options are generally paid to employees with the highest marginal income tax rates, they have important implications for the State s General Fund revenues. The stock market has a very direct and dramatic impact on stock option income, and an increased reliance on this form of income heightens the sensitivity of the General Fund to the stock market. Stock options are agreements to sell a certain number of shares of a given stock at a stated price the exercise or striking price during a specific period in the future.
Stock options are attractive for several reasons.
They give the recipient an ability to share in the fortunes of a successful company. Since options normally cannot be exercised immediately, they enhance employee loyalty. Options can also improve a company s profitability in the short run by substituting for cash wage payments. Stock options usually have a stated life-span. Typically, stock options issued in lieu of wages cannot be exercised until three years after their issuance and expire after ten years.