Companies avoid $34M in city taxes thanks to ‘Twitter tax break’

Old and new the Merchandise Mart Building, (left) is home to Twitter along Market St. at 10th in San Francisco, Calif. on Thurs. September 24, 2015. Old and new the Merchandise Mart Building, (left) is home to Twitter along Market St. at 10th in San Francisco, Calif. on Thurs. September 24, 2015. Photo: Michael Macor, The Chronicle Buy photo Photo: Michael Macor, The Chronicle Image 1 of / 1 Caption Close Companies avoid $34M in city taxes thanks to ‘Twitter tax break’ 1 / 1 Back to Gallery

Businesses in San Francisco’s Mid-Market district skirted nearly $34 million in city payroll taxes last year thanks to a controversial incentive program known as the “Twitter tax break” intended to keep tech firms from fleeing for Silicon Valley.

That sum, published in a report released Monday by the San Francisco Controller’s Office, increased by about $30 million from 2013 and is five times greater than the amount of taxes companies avoided in the two previous years combined.

The increase can be attributed, in part, to the fact that the city includes stock options in its payroll tax calculations, city officials said. Several Mid-Market companies have gone public since the incentive went into effect in 2012, including Twitter in 2013 and Zendesk last year. The 2013 figures didn’t include Twitter’s $25 billion initial public offering nor Zendesk’s $100 million IPO.

The incentive — a temporary exemption on the city’s 1.5 percent payroll tax for companies that moved into buildings in Mid-Market — was meant to attract rapidly developing tech companies and keep them from moving elsewhere.

It allowed businesses that chose to stay in the area, or move into the Mid-Market district, to cap payroll taxes at the amount they were paying when they finalized their agreement with the city for six years in an eight-year period. About 20 companies, primarily tech firms, have taken advantage of the break since its inception.

MBA BY THE BAY: See how an MBA could change your life with SFGATE's interactive directory of Bay Area programs.

Last year, six companies qualified for the program — a drop from 11 in 2013.

Seeking to spur growth

The incentive operates under the premise that if the city can secure tenants like Twitter, other tech companies will follow suit and move into the area, spurring economic growth.

Supporters say that despite last year’s loss of $34 million in potential payroll tax, the city gained thousands of jobs, additional business tax revenue and general economic vitality that it would lose if companies like Twitter and Zendesk left town.

The report did not specify how much the city made in business tax revenue from Mid-Market companies in 2014, though Mayor Ed Lee issued a statement boasting the city’s “record revenues in business taxes.”

In 2013, the city tallied a net gain of $3.4 million from businesses in the tax-exempt zone.

Lee credited the tax break for helping the city “emerge from the Great Recession” and revitalizing the area.

“Our city is thriving with new jobs for businesses large and small, new investment, new housing and a renewed confidence in our future,” Lee said.

He called the Mid-Market area a center “of new job creation, affordable housing production and the arts in San Francisco, bringing millions of dollars in new revenue to fund vital city services.”

Program draws criticism

Critics have decried the program, saying the incentive panders to multibillion-dollar companies at the expense of small businesses and city residents who are increasingly being priced out of San Francisco.

“There needs to be a balance in the kind of investments that we’re making,” said Angelica Cabande, director of the South of Market Community Action Network. “Not only does this drive up rent and drive out small mom-and-pop businesses, it’s displacing working-class people who work in jobs that help the city run.”

Cabande also pointed to Twitter’s recent layoffs — about 240 people were fired from the tech giant’s San Francisco office in a worldwide restructuring that resulted in 336 lost jobs — as proof that the tech companies aren’t creating as many jobs as city officials claim.

Marissa Lang is a San Francisco Chronicle staff writer. E-mail: mlang@sfchronicle.com Twitter: @Marissa_Jae