Twitter and San Francisco proposed tax break

An item on the February 8, 2011 San Francisco Board of Supervisors agenda was the following:

"110155 [Business and Tax Regulations Code - Payroll Expense Tax Exclusion in Central
Market Street and Tenderloin Area]
Sponsors: Mayor; Kim, Chiu and Farrell
Ordinance amending Article 12-A of the Business and Tax Regulations Code by adding Section
906.3 to establish a payroll expense tax exclusion for businesses located in the Central Market
Street and Tenderloin Area. ASSIGNED UNDER 30 DAY RULE to Budget and Finance
Committee."

As reported in the press,* this amendment is to provide a 6 year payroll expense tax holiday for companies hiring new employees in the area noted above, most notably, for Twitter which is considering moving out of San Francisco.

* For example, see San Francisco Chronicle, 2/10/11 - "Tax break to Twitter makes sense."

Additional Information:

• Per the Twitter website - they have job openings - quite few are listed!
• The SF Payroll Tax Expense is described by the city as follows: "all businesses with a taxable San Francisco payroll expense of greater than $150,000 must file a Payroll Expense Tax Statement for their business annually by the last day of February for the prior calendar year (Jan. 1st - Dec. 31st). The Payroll Expense tax rate is 1.5% or .015. You calculate the Payroll Expense Tax by multiplying the business' annual San Francisco payroll expense by 1.5% or .015, the Payroll Expense Tax rate." So, this tax is on medium and large-size businesses.

Tax Policy Analysis:

• Equity: The proposal is not just aimed at Twitter but at any company that adds employees in the designated area. This makes the tax cut more equitable.
• Neutrality: The proposal violates the principle of neutrality in that it will encourage companies to locate new employment in the designated area rather than in other parts of the city.
• Accountability: Stories in the papers noted that Twitter's employee base would be growing from 200 to 2,000 over the next few years. But what if it doesn't grow that much? Of course if it doesn't grow that much, it would never owe payroll tax on a higher payroll expense amount because there wouldn't be higher payroll. But while it will likely grow past 200 employees, what if it doesn't meet some particular goal? The city would have lost the payroll tax on the greater number of employees without the benefit of having offered the tax break in the first place. For accountability, a goal and clawback provision should be included. For example, if an employer's employment doesn't grow by X% by a certain date, it must pay back some percentage of the tax savings it obtained.
• Appropriate government revenues: Does the city not need more tax revenues? It is likely considering the fact that without Twitter, it will have nothing, so keeping it and collecting payroll tax on 200 employees is better than nothing. But will the city be able to deliver services to a larger company without additional revenues? Will other tax increases or spending cuts be needed?

Tax incentives tied to competitive pressures facing jurisdictions can be difficult. Whatever city Twitter is planning to move to (I saw two different cities noted in newspaper articles), could offer some better tax break. This is what economists call the "race to the bottom" with the companies being the winners and the jurisdictions and other taxpayers often the losers.

What do you think?