April 3 (Bloomberg) -- On April 15, union workers will march to Twitter Inc.’s San Francisco headquarters to give the microblogging service a bill for the tax break it got three years ago to stay in the city.
The tab, according to the union: $56 million.
“What we’re talking about here is to bring some equity and to figure out how we make sure the prosperity that’s out there flows evenly,” said David Campos, a member of the San Francisco Board of Supervisors who took part in a union-organized rally against Twitter in February. “Many working people, middle-income people, even upper middle-income people, are being left behind.”
Tax exemptions intended to attract and retain technology companies are emerging as the next battleground in an income inequality debate that has drawn global attention. With San Francisco outpacing nearby Silicon Valley in high-tech job growth, tensions are growing over the tax revenue protesters say was given away as California’s fourth-largest city becomes less affordable to low-income residents.
San Francisco officials, including Mayor Ed Lee, and Twitter’s Colin Crowell said the company and others that moved into the blighted Mid-Market district might have left the city if not for the payroll-tax exemption.
“The taxes that they think the city is not receiving because of the tax arrangement, if the tax arrangement wasn’t there, they still wouldn’t be receiving because Twitter and all these other companies wouldn’t be there,” said Crowell, Twitter’s vice president of global public policy. “So that’s why there is a net tax benefit even with this tax arrangement.”
The tax break will cost the city about $100 million, including $56 million in lost tax dollars from Twitter, according to the Service Employees International Union Local 1021. Campos, who is running for state Assembly, has requested a Board of Supervisors hearing on the issue.
“We don’t believe a billion-dollar corporation needs a tax break when we see what’s happened to city services since the Great Recession,” said Larry Bradshaw, vice president of the union, which is leading the tax-day Twitter protest.
The union, representing mechanics and clerical employees, began renegotiating its contract with the city in January. Twitter is worth $26 billion, as its shares have gained 76 percent since a Nov. 6 initial public offering.
The debate over income inequality, echoing President Barack Obama’s national campaign to raise the minimum wage, has also led to protests targeted at private commuter buses that ferry Google Inc. employees from the city to its Mountain View headquarters.
Twitter was poised to move out of the city in 2011 because it was preparing for a hiring spree that wouldn’t have been feasible with the city’s payroll tax and levies on stock-based compensation, Crowell said. Twitter still pays payroll taxes at pre-exclusion levels, he said. Increases in compensation since then aren’t taxed under the six-year arrangement that applies only to companies located in the Mid-Market area.
Before the exemption, Twitter had an incentive to leave, according to a 2011 report by the San Francisco controller’s office. The company’s payroll-tax liability on stock-based compensation alone would have run to tens of millions of dollars if it remained in the city when it went public.
The long-term payroll tax growth stemming from the tech industry’s move to Mid-Market outweighs the payroll-tax growth that could have been expected if Twitter moved out of the city by an average of about $2.7 million a year over 20 years, the report said.
Seventeen technology companies, including Zendesk Inc., a customer-service software company, and Yammer Inc., a social network for businesses, have moved to Mid-Market since the Board of Supervisors approved an exemption to those taxes in 2011, said Todd Rufo, director of the San Francisco Office of Economic and Workforce Development.
San Francisco’s payroll levy, largely unique to the city, crimped job growth and forced companies planning to go public to move elsewhere to avoid it, officials say. Most cities use a gross-receipts system, which taxes a company’s revenue instead of employee compensation. San Francisco voters in 2012 approved a ballot measure Lee promoted to phase out the payroll levy and replace it with a gross-receipts tax beginning in January.
“We all know that there are companies that would have left our city, which would have cost our tax base millions of dollars,” said David Chiu, president of the Board of Supervisors, who supported the tax exemption. “And because they have stayed in San Francisco, we have seen tens of millions of dollars stay in the city in increased property taxes, sales taxes, commercial taxes and other business taxes.”
‘Stroke of Genius’
After Twitter’s move to Mid-Market in 2012, other companies, including Uber Technologies Inc., a taxi service that lets people summon drivers by smartphone, and Square Inc., the payments startup co-founded by Twitter Chairman Jack Dorsey, moved to an office building a block from Twitter’s headquarters that didn’t qualify for the Mid-Market tax break, Rufo said.
“The Twitter tax break was a stroke of genius that catalyzed the whole neighborhood,” said Oz Erickson, chairman of San Francisco-based Emerald Fund, which is building a high-rise apartment tower just outside the benefit zone with 400 market-rate units. “This used to be a scary, dangerous place.”
Union laborers, including ironworkers and electricians, gained from Twitter’s decision to stay in the city, earning top wages and paying income taxes after working on nearby AvalonBay Communities Inc. and Crescent Heights Inc. apartment towers and Dolby Laboratories Inc.’s new headquarters, Erickson said.
Waiters and chefs employed at new restaurants in turn spend tips in other retail shops that produce new sales tax revenue, he said.
In 2010, Mid-Market had empty buildings and storefronts, including a 31 percent storefront vacancy rate along a three-block stretch, the largest in the city, according to a March 2011 report by the city’s budget and legislative analyst. Much of the business activity involved convenience or liquor stores, and there was “significant illegal street activity,” the report said.
The vacancy rate fell to 22 percent in 2013 and 14 companies have taken advantage of the tax break, according to an Office of Economic and Workforce Development report.
“All of that now is hot real estate,” Lee, 61, said at a March 13 appearance at the Commonwealth Club of California, a non-partisan public affairs forum in San Francisco. “People are setting up businesses, there’s housing being built -- some 3,000 units on Market Street alone will open up within months.”
Office rents in the tax-break zone have soared 83 percent since reaching bottom in the 2010’s first quarter, a year before Twitter announced it would stay in San Francisco and lease space in a renovated furniture mart within the area, according to commercial brokerage Jones Lang LaSalle. Asking rates in this year’s first quarter averaged $51.14 a square foot in Mid-Market, up from $27.94 four years ago, JLL data show.
“There wasn’t a whole lot of momentum until Twitter announced they were doing a deal,” Julia Georgules, JLL’s Northern California research manager, said in an interview. “All of a sudden Central Market became a place developers could do renovations in large empty buildings that tech firms could see themselves growing into.”
The change to Mid-Market is making it harder for low-income people to live and do business there, said John Avalos, a San Francisco supervisor who took part in SEIU’s February rally at Twitter and voted against the payroll-tax break.
“Twitter’s presence was like some kind of corporate change-over that was going to remake the area in a way that we wouldn’t recognize anymore,” Avalos said.
More than four out of five likely voters in California say they believe the gap between rich and poor in the U.S. is growing, according to a survey released last month by the nonpartisan Public Policy Institute of California.
The payroll-tax system punished companies for creating jobs, said Adam Goldstein, 26, a Massachusetts Institute of Technology graduate from New Jersey who co-founded Hipmunk Inc., a San Francisco-based online travel search tool, in his living room in 2010.
“Every employee they hired, they had to pay more in taxes,” Goldstein said in an interview in his South of Market office, a warehouse-like space that features ping pong and pool tables and a 7-foot-tall chipmunk wearing light-blue goggles and scarf. “If you want a city that employs a lot of people, you can’t have something like that discouraging it.”
The payroll-tax exemption has succeeded in addressing the Mid-Market district’s longstanding economic struggles, similar to previous incentives such as tax-increment financing that were granted to other areas and attracted private investment for development, said Phil Ting, a California assemblyman who previously served as San Francisco’s tax assessor.
“There’s no question the tax break did its job and created a lot more interest in Central Market than ever before,” Ting said.
To contact the editors responsible for this story: Jeffrey Taylor at firstname.lastname@example.org Don Frederick