San Francisco Controller Publishes Candid Report On How Badly They Need Twitter

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San Francisco Supervisor John Avalos hates the idea of businesses not paying a 1.5% tax on payroll and employee stock option gains (see his brilliantly stupid quote here). The fact that San Francisco is the only city in California to charge a payroll tax at all doesn’t seem to matter to him. Or that it’s the only city in the world to charge a local tax on stock options. Or that Twitter and other startups will simply leave if the taxes stand.

Or even, apparently, that the city’s own economists disagree with him. A new report published by the city and county’s Office of the Controller outlines the absolute absurdity of San Francisco’s tax treatment of technology startups. The entire report is embedded below.

The background: San Francisco taxes startups like no other city in the world. Not only is there a 1.5% payroll tax, but the city also tries to tax stock option gains, something so audacious that no other city, anywhere, tries to do the same. See Sarah Lacy’s February 18 article on how that tax can actually eat up most of the money a company might raise in an initial public offering, ranging into the tens of millions of dollars.

Twitter, Zynga and other startups are threatening to leave the city unless the taxes are waived for a period of time. The stock option tax appears to be the biggest issue. From the report:

Twitter’s potential future payroll tax liability associated with its stock options appears to be the largest cost factor weighing against a San Francisco location. The City should consider modifying the payroll expense tax, to reduce the incentive for successful technology companies to move out of San Francisco.

and

However, the future value of Twitter’s stock options is unknown, but likely very large given their current value and the company’s recent growth. Its future payroll tax liability for that form of compensation could be significant, perhaps reaching into the tens of millions of dollars over several years. If that is the case, the company’s payroll tax would make a San Francisco location significantly more costly than a San Mateo County alternative.

The report goes on to illustrate how much more expensive it is to do business in San Francisco than even South San Francisco, just to the south. San Francisco charges the payroll tax (averaging $1,500 per person per year at Twitter), whereas South San Francisco charges a $15/year fee per employee (yes, fifteen dollars). Another factor – rent in SSF is about $35/square foot, compared to $100 in SF.

The report also says that it makes financial sense to give Twitter a tax waiver, saying that it would bring in $52 million more in tax revenue over the next twenty years:

Because of this, the legislation was analyzed based on the assumption that Twitter would leave the city if it was not enacted, and would move to the SF Mart if it was. Under these two scenarios, the long-term payroll tax growth associated with the formation of an technology industry cluster in the Central Market area outweighs the payroll tax growth that could reasonably expected to occur without Twitter, by approximately $2.7 million per year on average over twenty years. In addition, the legislation can be expected to lead to higher job growth and property values in the area, which will also increase sales, hotel, utility user, property, and transfer tax revenues.

Of course, that assumes that other startups will flock to the area, and they’d be taxed normally. But there also other tax benefits. Note the last sentence in the paragraph above.

How will the Board of Supervisors vote tomorrow on the proposed tax free-area? We’ll have to wait and see. But at least the city economists have some idea of how destructive all of these taxes are, and how much the city needs companies like Twitter, Zynga and Salesforce (and TechCrunch!). Being based in San Francisco is nice, so all your hipster designers can ride their bikes to work every day. But being shaken down by the Board of Supervisors for tens of millions of dollars, and regularly trashed in the press, may be a little too much for these startups and their venture capitalists, to handle. Those hipsters may need to fire up their Prius’ and take a short drive down the Peninsula sometime very soon.