In his October 27 story, “Twitter tax break” could cost SF tens of millions more after IPO
,” SF Chronicle reporter James Temple conflates two distinct tax breaks: the "Twitter" Mid-Market/Tenderloin payroll tax exemption on net new hires, and the Zynga-inspired exclusion of stock options. This latter tax break, which Temple claims has unexpectedly cost the city millions of dollars, was sponsored by then Supervisor Ross Mirkarimi. Mirkarimi argued in his press release, “San Francisco is the only city in California that levies a payroll tax and one of the few in the nation to tax stock options. Meanwhile, the San Francisco Controllers Office finds that future tax liability associated with stock options appears to be a significant incentive for successful tech companies to locate outside the City.” Twitter's stock option liability was addressed by the Mid-Market exemption; this led Mirkarimi to sponsor legislation exempting companies throughout the city from the stock option portion of the payroll tax.
I wrote at the time (“Bay Guardian Shows Hypocrisy on Mirkarimi Stock Option Plan
”) how even the Bruce Brugmann owned SF Bay Guardian was not opposing Mirkarimi’s stock option break. After all, under its reasoning it could “cause at least ten times and potentially over 100 times as big a hit to the city’s general fund as the targeted “Twitter” tax break that the Guardian described as creating a “massive tax giveaway zone.” While the stock option legislation is now being portrayed as some sort of giveaway to wealthy tech companies, Mirkarimi's legislation faced no public opposition. I noted that even SEIU Local 1021, which joined Mirkarimi and the Bay Guardian in opposing the Mid-Market-Tenderloin tax measure, described the stock option waiver as “honestly trying to deal with tax policy.”
San Francisco’s revenue and economy gained enormously from both of the payroll tax measures passed by the Board in 2011. Mid-Market stagnated for decades prior to the net new hire break, and Twitter’s announced move triggered billions of dollars in new investment. While Mid-Market still has challenges, it is finally on a path to revival.
Without the net new hire tax exemption, city revenues would be sharply down, unemployment would be at the higher 2011 levels, and nonprofit workers funded by city contracts could have faced layoffs rather than getting cost of living increases the past two years.
Phantom Stock Option Dollars
The three Supervisors who opposed the Mid-Market exemption- Mirkarimi, Campos and Avalos---backed the stock option waiver, which passed 8-3 (Elsbernd, Chu, and Farrell, who backed the Twitter tax exemption, voted no). The Board majority, along with Mayor Lee, recognized that no tech company would stay in San Francisco if their stock options were treated differently than any other city in the United States. As Mirkarimi explained in a May 15, 2011 SF Chronicle op-ed
“Startup firms often begin with limited capital, but expect significant growth. Employees are partly compensated in stock that has uncertain value before going public. Once the companies reach the initial-public-offering stage, however, they face a huge tax spike in San Francisco - a cost that that does not exist anywhere else in California.”
Stock options were included as part of the city’s original payroll tax enacted in the 1970’s. Nobody imagined the steep increases in these options through IPO’s three decades later, and they were also a non-issue during the dot-com boom (as companies dissolved prior to public offerings).
This history explains why Mirkarimi and his colleagues recognized that fairness and the city’s economic future required a legislative change. As his Chronicle op-ed favorably citing a controller’s analysis put it, "An efficiently-designed stock options exclusion, can ... have the policy advantage of providing a tangible benefit to a few successful companies, reducing their incentive to leave San Francisco, while leaving the majority of taxpayers - and the city's payroll tax revenue - unaffected."
Temple is wrong--- the stock option exemption is not “costing” San Francisco a dime. Zynga, Twitter and other tech companies would have left SF rather than pay the extra taxes, which is why the Board’s leading progressive supervisors all backed the measure.
The lack of any public or organized political opposition
to the Mirkarimi measure is telling. It says that the city’s entire political establishment, city unions, nonprofits and all those regularly down at City Hall in budget hearings all understood that the stock option revenue that the Chronicle and others are now mischaracterizing as "lost" millions was nothing more than phantom dollars.
SF’s Surging Economy
While the Chronicle’s Temple believes that “Whether it all adds up to a good or bad deal for the city is a tricky — and ultimately subjective — question, “ I think most San Franciscans see the Mid-Market tax exemption’s stimulus impact as a huge gain for the city. After the city worked fruitlessly to improve Market Street for years, I cannot imagine there are many who believe the area would be better off had Twitter been rebuffed, and the area left to stagnate.
Some of my nonprofit colleagues see no connection between the four years of no city cost of living increases before the Twitter tax credit and the increased city revenue that gave nonprofit workers funded by city contracts raises the past two years. Nonprofit groups always do better in fiscal good times, and are the first to get cut when times turn tough.
Economic good times have prompted speculator evictions in Mid-Market, but Mayor Lee, D6 Supervisor Kim and the Department of Building Inspection have aggressively intervened to stop this displacement
. And let’s not forget that Mid-Market had a history of tenant turnover and rising rents before the current tech boom; recall the displacement of Grant Building tenants at 7th and Market, the vacation of residential tenants at the Warfield Office Building, the eviction of small Filipino businesses from the Mint Mall
at 6th and Mission and the eviction of retail tenants on Market between 6th and 7th streets.
San Francisco rents always sharply rise when the economy booms. The city’s response should not be to promote unemployment and decline, but to prevent speculative strategies and protect the vulnerable.
While one’s view of any policy is “subjective,” that the Twitter tax credit was a great deal for San Francisco's economy is beyond serious dispute.
Randy Shaw is Editor of Beyond Chron and Director of the Tenderloin Housing Clinic. His new book is The Activist’s Handbook, Second Edition: Winning Social Change in the 21st Century