Now there are numbers to bear that out: A report the San Francisco Controller’s Office released Monday indicated the city brought in $7.6 million more in business tax revenue last year from the tax-break zone than the area had generated before the incentive, while the city gave up only $4.2 million in waived tax revenue under the program in 2013.
Board of Supervisors President David Chiu pointed to that as a $3.4 million net gain for the city and evidence the incentive program — commonly known as the “Twitter tax break” — was “absolutely” worth it. The tax deal, passed in 2011, gives a break on payroll taxes, including stock options, for six years to companies that grow in the Mid-Market or neighboring Tenderloin area.
“This report confirms that the Mid-Market and Tenderloin tax program is working,” said Chiu, who had pushed for the tax break in 2010 along with Mayor Ed Lee and Supervisor Jane Kim. “Three years ago it was about revitalizing a part of our city that had been blighted for decades. ... We are turning that around with this program in a way that’s both creating jobs and bringing in more revenue.”
Even as the economy recovered citywide, the tax break zone generated $7.1 million more in payroll tax than it would have if it had grown at the same rate as the rest of the city from 2010 to 2013, according to the report by Ted Egan, the city’s chief economist.
“The turnaround in Central Market in just three years is truly remarkable,” Lee said in a statement.
For the city as a whole, the net benefit or loss of the tax break is more muddled. It depends on two things: whether the tax break prevented businesses from leaving the city and whether it prompted businesses to move into the tax zone that would have grown elsewhere in the city.
Effects of stock sale
The 2013 tax figures also don’t include Twitter’s $25 billion initial public offering last year, however, and the cost of the tax break is likely to spike this year when Twitter’s stock sale is at least partially factored in.The lockup agreement that limited the ability of Twitter insiders to sell their stock holdings to the public expired May 6. On that date, 82 percent of Twitter’s equity was reportedly able to be sold, and the sharp decline in the stock’s price on that date suggest that some of Twitter’s insiders did sell their holdings, Egan’s report said.
Those earnings would have been taxable by the city, but are now exempt — under both the Mid-Market tax break and subsequent legislation that gave a tax break on startup companies’ stock options.
The program was designed in part to prevent Twitter from fleeing to the Peninsula as it expanded and faced a steep tax bill from its initial public offering. After the legislation passed, Twitter set up shop in what had been a nearly vacant furniture market building at 10th and Market streets.
Over three years, 19 primarily tech companies have taken advantage of the tax deal, including Zendesk and Yammer, now a division of Microsoft. Through 2013, the city has foregone $6.1 million in taxes under the program.
Opponents of the deal on the city’s political left have blasted it as a giveaway to multimillionaire tech barons.
“There is nothing in the report that shows but for the tax break this would not have happened,” said Supervisor David Campos. “Many people believe that without the tax break, Twitter would have stayed. If that had happened, we’re talking about millions of dollars we would have had for basic city services.”
'Shades of gray’
Egan’s report, however, found that “every major company that used the exclusion is a relatively young technology company. It may therefore be reasonable to assume that at least some of them remained in the city because of the exclusion, but it is impossible to determine with certainty for any particular company.”Campos’ progressive colleague, Supervisor John Avalos, said the economic boomlet in the Mid-Market area is tempered by the overall spike in housing and other living costs during the city’s current tech-fueled surge.
“What's the point of saving Mid-Market when one consequence of the tax break has been that many of San Francisco’s longtime residents have been turned out for new Mid-Market workers who can withstand the affordability crisis?” Avalos asked.
The report, though, found that there was “no appreciable difference” in trends in commercial rent, residential asking rents, and housing values in Mid-Market and the Tenderloin versus the rest of the city, which were all seeing rapid growth.
“I don’t think it’s as black and white as the tax break is a positive or the tax break is a negative,” said Gail Gilman, executive director of Community Housing Partnership, which helps homeless people secure housing and get back on their feet.
Her nonprofit rents office space in Mid-Market for its 50 staff members and owns a building with 60 low-income tenants about a block away.
“I think its more shades of gray,” Gilman said, “but the tax break has helped a lot.”
©2014 the San Francisco Chronicle
