Two months ago, the internet was, er, a-twitter about a tax deal that San Francisco appeared to be making in order to keep hot tech companies inside the city. The deal, which was focused on the social media darling, Twitter, would grant a payroll tax exemption in exchange for a move to a long-neglected area of the city. The plan was to give the high profile company a reason to stay, thus, in theory, boosting the coffers of the city by drawing new businesses and dollars to an area of the city that wasn’t quite so profitable. Everybody wins, right?
Maybe not. Another tech company, Zynga (the company responsible for those annoying Farmville posts on your Facebook wall), has reportedly also threatened to leave the city, upping the pressure on officials to do something about the much-reviled city payroll tax. Together, the two companies are demanding a tax break equal to tens of millions of dollars.
The payroll tax requires companies with payrolls over $250,000 to pay the city a percentage (1.5%) of employee compensation. Compensation includes not only wages but gains from the exercise of stock options, kind of the bread and butter for start up companies.
Twitter has estimated that remaining in the city would cost an additional $30 million over five years in combined rent, taxes and “other expenses.” An extra $6 million per year is a lot to dole out. But Twitter is catching some flak over that amount when compared to its overall value: an estimated $4.5 billion.
The city of San Francisco, by comparison, has an annual budget of $6.6 billion, just over the entire value of Twitter, and less than the combined estimated value of Twitter and Zynga. And unlike Twitter, which is expected to continue to make money, San Francisco is struggling. The city has to make cuts across the board which will include firing employees and cutting social services and public safety programs. Faced with the prospect of job losses and the reduction of services, San Franciscans aren’t as enthusiastic as Mayor Ed Lee about giving Twitter a tax break.
What may be even more damaging in the long run is Twitter’s image. The company has long been publicly a proponent of social consciousness but this latest chess game has shown them to be all about business. While it might not hurt the wallets of its founders (I’m sure that Biz Stone is doing just fine), it might hurt their reputations. A number of rock stars, including U2’s Bono, found that out the hard way when they moved their bands to other countries in order to save on tax dollars: Bono has long said that he has been “stung” and “hurt” by the criticism of him as hypocritical to champion social causes and then flee for lower taxes.
I don’t think anyone expects Twitter and Zynga not to get the tax breaks they’re seeking. But they might get a little something else they didn’t: public scorn. That may be tough to take for the current darlings of the internet. Worth the $30 million?
In the days of internet business, there is no clear reason to stay in a high tax local. For the $30 million in savings just about any company can afford to move. Don’t be supprised when companies leave the USA or play tax shell games to keep profits away from the tax man. Google, Apple & Microsoft already do the Double Dutch Irish Sandwitch. The first responsibilitiy companies have it to maximize profits for shareholders. This is retirement money.