Twitter's IPO could cost San Francisco $56 million in tax dollars

San Francisco struck a deal to keep Twitter from leaving, but it may cost the city more than previously thought.

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Credit: REUTERS/Robert Galbraith

In 2011, the city of San Francisco struck a deal to keep Twitter from moving its offices out of the city, exempting the company from paying the city's payroll taxes on new employees for six years. It was a pretty significant tax break - in San Francisco, businesses that pay employees more than $250,000 per-year are taxed 1.5% tax on employee compensation. At the time, the budget analyst for the city's Board of Supervisors estimated that Twitter would save $22 million on account of the tax break, the San Francisco Chronicle reported.

However, that estimate didn't factor in the potential impact of a public offering, which will increase the tax-exempt employee income drastically. More recent analysis by the Chronicle finds that Twitter's IPO, which is expected to be filed the week of November 4th, may cost the city more than $56 million, the Chronicle reported this weekend:

Twitter, which plans to go public on the New York Stock Exchange, has set its stock offering at between $17 and $20 a share (though it could rise in the weeks ahead). If all of its executives and employees unloaded their options and restricted stock units at the midpoint of $18.50, they would make $2.3 billion (after subtracting what they’d have to pay to buy certain of those shares at the option price). That would add up to $34 million in lost tax revenue for the city.

The $34 million would be in addition to the initial $22 million estimate. This number, however, isn't necessarily exact. The Chronicle pointed out that it's highly unlikely that every employee will sell their shares at the initial price. Some may not even sell their shares before the city's six-year deal is up with Twitter.

At the same time, however, the actual value of Twitter's stock will remain unclear until its IPO. Twitter has the potential to fall in value upon its initial listing, as Facebook did, but it could also grow in value and inflate that potential figure. 

Meanwhile, the San Francisco Mayor's office has defended the deal by pointing to the social and economic impact Twitter made on the city by agreeing to the deal. Had Twitter made good on its threat to leave the city - and considering that California was the only state that charged a payroll tax at the time, it would have - San Francisco wouldn't have gotten anything from Twitter, which promised to continue cultivating the city as part of the agreement.

A separate San Francisco Chronicle story delves deeper into Twitter's actual impact since that 2011 deal. One of the benefits that Twitter brought as a result of the tax break was its influence on other tech companies. The deal wasn't specifically with Twitter, but with companies that agreed to move into the Mid-Market and Tenderloin districts of San Francisco, each of which had been "burdened with high vacancies and blight for decades," the city's Mayor Ed Lee said at the time of the agreement. After Twitter agreed to move to the area in exchange for the tax break, other large tech companies, such as Yammer and Zendesk, have moved in (the Chronicle also casually mentioned that Square, the payment company launched by Twitter co-founder Jack Dorsey, also moved into the neighborhood, but without tax exemption, which was commendable enough to mention in this blog post).

In total, the neighborhoods have seen some substantial improvements, according to the Chronicle:

"Retail storefront vacancy has dropped from 30 to 22 percent, sales taxes climbed by 21 percent and 4,500 housing units are in the pipeline for the neighborhood."

However, the numbers don't tell the full story. Read the Chronicle story in full for a detailed look at how the city's tech boom, and the subsequent "hyper gentrification," is affecting the city in general.

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Copyright © 2013 IDG Communications, Inc.

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