Photo: Flickr/Charles Nadeau
Twitter will be hit with $35 million in city payroll taxes over the next six years if it stays in San Francisco — and that’s only if the city enacts a tax break. The bill will be tens of millions of dollars higher without the break.Worse yet, Twitter will have to move to a blighted area of town and spend about $30 million on renovations just to get the tax break at all.
The estimates come from a new report by the San Francisco Controller’s office, which supports establishing a new economic development zone southwest of downtown. The main benefit of the zone would be the temporary exemption of stock options from the city’s 1.5% payroll tax.
This tax is San Francisco’s second-biggest source of revenue, and contributed $345 million to city coffers last year. But as TechCrunch has reported extensively, no other city in the world has this kind of tax, and it could cost pre-IPO companies located in the city — like Twitter and Zynga — tens of millions of dollars when employees exercise their options.
But in making its case for the zone, the report doesn’t exactly make a convincing case for Twitter to stay. Here are some of the problems it cites:
- Payroll tax. This is the biggie: a payroll tax on exercised options would cost Twitter “tens of millions,” assuming the company goes through an IPO. But even without options, Twitter would still have to pay an estimated $1.6 to $3.2 million per year. In South San Francisco, Twitter would only pay the city $15 per employee per year — a few thousand dollars.
- Renovations required. The building Twitter is supposedly considering moving into is 95% vacant and has never been used as office space — it was a wholesale furniture showroom. The report estimates Twitter would have to spend $30 million to get the building ready.
- The area is going to become even more deserted soon. Nearly 3 million feet of office space in the Civic centre area is going to become vacant in the next 18 months, thanks to planned moves by the SF Public Utilities Commission, Bank of America, and State Compensation Insurance Fund.
- Commute times. It doesn’t cost as much to commute to work in the city as it does to commute to the next towns to the south, but commute times are longer, which is more important. As the report says, “The city’s average high time cost of commuting particularly discourages workers in high-wage industries, such as information technology.”
The report concludes that “it seems unlikely that Twitter would remain in San Francisco if the proposed legislation is not enacted.”
But even if the legislation is passed, Twitter and other pre-IPO startups would still have a stark choice if they want to stay in SF: move into a mostly deserted and currently blighted area, or face crippling payroll taxes. Or leave the city altogether.
The Controller’s report is embedded below: