Twitter, the company that gave the world 140-character communications, is threatening to leave San Francisco and take 350 employees to a new headquarters in Brisbane. City officials are nervous — losing a world famous high-tech outfit that has plans to double its workforce in the next few years would be a blow to the city's reputation as a technology incubator.
So the Mayor's Office of Economic Development is scrambling to cut a deal, and the latest plans call for a payroll tax exemption that would cap the company's future tax bills at $250,000. Twitter's looking at office space on Ninth and Market streets, an area that needs an economic boost, and the supervisors — particularly Jane Kim, who represents that district — will be under immense pressure to sign off on the deal. In fact, Kim told us that Twitter has delivered a very clear message: either give us the tax break or we'll leave.
Bowing to that pressure would set a terrible precedent. The supervisors should say no.
Companies threaten local governments all the time, demanding zoning concessions, tax breaks, infrastructure upgrades and all sorts of other handouts, and typically they announce that tax relief is central to where they set up shop. In reality, the economics of business location decisions rarely hinge on local taxes. Greg Leroy, the author of the 2004 book The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation, cites a study showing that the cost of labor and transportation generally account for around 75 percent of the factors that drive business location decisions; taxes are less than 4 percent.
In Twitter's case, the payroll tax will be a tiny part of the price of leasing and moving into a new office that can accommodate significant growth. Payroll tax data is confidential, but it's not hard to make rough estimates. Twitter has abut 350 employees now, and if they make an average of, say, $70,000 a year (reasonable in a high-tech firm), then the company payroll is about $24.5 million a year, and the city's 1.5 percent tax comes to $294,000. At its current level of employment, the tax cut would be almost nothing.
Even if Twitter doubles its workforce, the amount it would save with the city's proposed tax break is only about $300,000 a year (the cost of two or three high-end employees out of the 350 the company wants to hire). If Twitter moves into the 200,000-square-foot space it's eyeing in Brisbane (sharing an office, reports say, with Walmart — how cutting edge!) and pays $25 a square foot in rent (probably low for nice office space), rent alone will be $8 million a year. Then there's the cost of all those workers driving (or taking a private bus) to a location badly served by transit. The payroll tax liability in San Francisco is tiny in comparison.
So this isn't an economic decision. It's corporate blackmail, the kind San Francisco sees all too often. "It's like this every time," Sup. John Avalos, who opposes the tax break, told us. "It's a race to the bottom."
Making it worse, the city can't legally give a tax break just to Twitter — the break would have to cover all companies either in a business sector or in a specific geographic zone. So the supervisors would either have to give tax breaks to a lot of other tech companies or, more likely, give the break to everyone moving into the Mid-Market area. That increases the cost to the city — and creates an odd situation. Under the Twitter proposal, big companies with big payrolls would get a break and small businesses would get nothing. (Black Rock LLC, which runs Burning Man, is also looking at space in Mid-Market, and the city's not offering that outfit — which employs 30 people and has an annual payroll of $3 million — any tax breaks.)
Frankly, there's no fair way to make this work. Any plan that does what Twitter wants will either benefit big companies at the expense of small ones, benefit new arrivals to the district at the expense of existing businesses, or cost the city so much money that it would be ridiculous.
We agree that the tech sector is an important part of the economy and that Twitter creates jobs in town and ought to stay here. But once you go down the path of caving in to corporate blackmail, it never ends.