Update: See San Francisco Controller Publishes Candid Report On How Badly They Need Twitter

San Francisco, unlike most other cities in Silicon Valley, has a 1.5% payroll tax. And even more stunning is that they consider gains on stock options part of payroll, meaning that any San Francisco based company going public or being acquired could get hit with a massive tax bill in the tens of millions of dollars.

They’ve got Twitter jumping through hoops to avoid the tax. The company will be forced to move to a new location in order to get a six year payroll tax break. But only if the Board of Supervisors votes to approve the legislation on Wednesday. The upside is that Twitter employees will have immediate physical access to prostitutes, drugs and weapons – the qualifying area isn’t exactly an up and coming neighborhood.

The city isn’t thanking Twitter for bringing all these high paying jobs to San Francisco, either. Rather, some supervisors don’t want the tax break at all, and seem quite willing to see Twitter bail to tax-free Brisbane. Says Supervisor John Avalos: “Who are the [Twitter] investors? Probably some of the wealthiest people in this country. And we are giving them more wealth.”

The stupidity of that statement is self evident.

But the city has another potential disaster on its hands – Zynga . The company is already moving into its new 270,000 square foot headquarters on Townsend Street, which is outside of the proposed tax free/hooker area.

We heard Mayor Edwin Lee and Board of Supervisors President David Chu met with Zynga at their offices today to negotiate the issue. I contacted Zynga to ask about the meeting. They confirmed it happened, said it was “positive and productive,” and “they appreciated the city’s interest in Zynga’s future growth.” They wouldn’t comment further.

We have heard, however, that Zynga is already looking to expand beyond the city into other areas in Silicon Valley. They already have offices in Sunnyvale and Los Gatos, for example. Our sources say Zynga is prepared to drive future employee growth outside of San Francisco. They’ll always keep some presence in San Francisco, say our sources, but may even consider moving the corporate headquarters south.

Whatever happens specifically with Zynga and Twitter, the city needs to do a very big reality check and soon. Tech startups aren’t just driving some job growth in the city, they’re driving absolutely all of it. Zynga hired 800 people in 2010, and they’re hiring another 1,500 in the next year, most of which would be in San Francisco. Twitter has a similar story. Those two companies, plus Salesforce, account for most of the technology job growth in the city.

Even if they cut specific deals for those companies, other startups understand that San Francisco wants a big payoff from tech startups. And the venture capitalists see absolutely ridiculous statements like the one from Supervisor Avalos above. If the city wants venture capitalists to steer clear of San Francisco startups, and for startups in general to not even consider the city as a place to do their business, they should keep doing exactly what they’re doing.

On the other hand, if the city wants to attract lots of high paying, high growth jobs, they need to reverse their policies and their messaging. Because right now they look like a pack of fecking eejits. Particularly Supervisor Avalos. They can have all the taxes they want, but if there aren’t any companies there to pay them, it isn’t going to be very helpful.