What The Twitter Tax Break Means For San Francisco

San Francisco Mayor Ed Lee and other city leaders stood on the third floor of a charity called St. Anthony’s on Friday morning, two stories above a bustling dining room where homeless residents were queuing up for hot meals. “This will be a day where we’re celebrating something,” said St. Anthony’s executive director Barry Stenger. “You won’t have tech companies and activists fighting each other about housing or something like that. Police won’t have to worry about separating somebody in a brawl.”

On the surface, they were all gathered to extoll the launch of a website called Link-SF, a portal that can connect those in need with the closest shelter, food or medical care. But that website was produced pro bono by a software company called Zendesk, in return for the same controversial tax break that inspired about 450 union members to protest outside Twitter’s headquarters earlier this month. That made the meeting a political opportunity for the mayor, a chance to prove that the tax break he brokered was paying off, and to emphasize that the tech companies bolstering the city’s economy aren’t so out-of-touch and navel-gazing as some residents believe—that they care about San Franciscans, not just profits.

“Services can now be accessed with the use of technology,” Lee said. “All the technology companies are registering that as they evolve, they want to be part of the success of the city.”

It was a far cry from the chants of the union protestors. “Twitter you’re no good,” they shouted, “pay your taxes like you should.”

The story of the so-called Twitter tax break goes back to 2011. The social media company, then located in a San Francisco neighborhood known as SoMa—the epicenter of startups—had told the city it was planning to relocate outside of town, where so many other tech giants are. Google, Facebook, LinkedIn, Apple and Yahoo might all be associated with the City by the Bay, but their main campuses are located south in Silicon Valley, where they do not have to funnel money into San Francisco coffers. Twitter said the deal-breaker was a payroll tax levied only inside city limits; with plans to double their staff, the company felt it couldn’t justify the cost, Colin Crowell, Twitter’s Vice President of Public Policy, said in a recent interview with TIME. “We were ready to go,” he said, “did not want to go.”

Twitter indicated it was interested in moving into a sprawling building on Market Street that had once housed a giant furniture mart full of showrooms and was virtually empty at the time. The mid-Market area, historically home to a thriving theater district, had become blighted over the years, with nearly one in every three storefronts sitting vacant. City officials saw Twitter as a potential “proof point” for other companies, that might draw more jobs and investment to the mid-Market artery. Lee, who was elected with the help of the tech industry, and other city leaders pushed for a compromise: for any company that agreed to locate in a specified geographic area around that building, the payroll tax would be waived for all new jobs they created for six years.

Angry residents continue to see the tax break as an example of politicians coddling the booming tech sector while many low-income residents are hurting—unable to afford skyrocketing rents that are in part pushed upward by well-paid tech workers flocking to town. “Twitter held San Francisco hostage,” Sarah Sherburn-Zimmer said at a recent meeting of housing rights advocates. At protests she helped organize this winter, people passed out fliers demanding that officials “End the two-tier system!” that many discontented citizens also see in the so-called Google buses, private shuttles currently using public bus stops for free. “As the city gives tax breaks and the use of public assets to rich tech companies for no measurable return,” the flier goes on, “evictions and rents continue to rise.”

A payroll tax is particularly problematic for a tech startup, Crowell said. Young tech businesses may have big ideas without any monetization plans and may need to go on a hiring spree before they start raking in money. Even during the time of its IPO this past November, Twitter hadn’t outlined any solid paths to profits. “The mayor and several supervisors recognized that this was a problem not just for Twitter but would be a problem for any similarly situated company like Twitter,” Crowell said. “It wasn’t just that we were saying it was bad.” With the break in place, Twitter agreed to move in and has since increased their local staff from 800 to 1,500. Prior to the IPO, the Securities and Exchange Commission estimated that the break could be worth up to $56 million; the city initially estimated that it would be worth $22 million.

Other businesses did indeed move in after Twitter and take advantage of the same deal, like the luxury-goods discount website One Kings Lane and music streaming service Spotify. Another handful announced that they’d be moving to the mid-Market area but not taking the break, such as sound company Dolby and Jack Dorsey’s Square. The area is showing signs of new life, with check cashing shops and shuttered storefronts now followed by upscale cafes that sell $65 beers. New tony apartment buildings are going up and construction workers are hammering away on renovations.

Mayor Ed Lee has zero regrets about the tax break. “I am absolutely convinced that Twitter would have moved out of the city. We would have lost not only the jobs that they had,” he told TIME for a magazine story in December, “but what they expected to create. … You look at the corridor, literally just two years ago, one of every three storefronts was vacant and dark, unattractive and blighted. Now you see the opposite. You see vibrancy, you see people walking along Market Street, wanting to be here, live here, work here, play here.”

But recent changes brought on by new investment also threaten to make the area less affordable for people and organizations that were there in pre-Twitter days. In the tax break’s wake came stories about nonprofits being priced out of the area, more familiarly know as the Tenderloin. Jeannie Kim, the owner of Sam’s Diner on Market Street, which has added servers to cater to new tech-worker crowds, sees the area as “definitely gentrifying.” Yes, there are more customers, she said, but prices for everything else are going up too. “It’s difficult because all these people are moving in, they have the money and paying $15 for breakfast is not a big deal,” she said. “But we also have people who work here and live here and they don’t make that kind of money.”

Companies that take part in the tax break deal also have to propose and agree to “community benefit agreements,” promises to help low-income neighbors in the Tenderloin—which some have taken to calling the “Twitterloin”—who would inevitably be affected by their presence. Creating Link-SF was satisfying part of Zendesk’s “CBA” from 2012. In their 2014 proposal, Twitter has vowed to send its employees out to volunteer in the area, provide pro bono legal assistance in eviction proceedings, donate at least $50,000 worth of computers and IT equipment to local schools and provide more than $300,000 worth of grants to groups like digital literacy non-profits.

Katy Steinmetz / TIME

For many angry about the tax break, these seem like small efforts that distract from the real point: that a company which minted an estimated 1,600 instant millionaires in their IPO was given special treatment and isn’t paying “their fair share of taxes,” as one eviction protestor said. The union protestors argued that the cash the city isn’t getting from those companies should have been used to improve city services. “We want to get rid of the Twitter tax break,” City Supervisor David Campos recently told the San Francisco Examiner. “I don’t know a single worker who gets a tax break from City Hall.”

Twitter’s Crowell said that is just one perspective and not the one they take. “There are some who focus on what they believe is the lost tax revenue from all the companies participating in the temporary payroll tax exemption,” he said. “But if the limited tax exemption didn’t exist, there’d most likely be no revenue at all from these companies—because they wouldn’t have stayed in the city.” Plus, he says, given the philanthropic efforts and job creation spurred by companies like Twitter, “this is a net overall plus for the city.”

Companies like Twitter and city officials who supported the tax break felt validated by a 2012 vote, in which citizens opted to switch from a payroll-tax model to a tax on gross receipts. “It was universally recognized that taxing jobs is not a smart way to promote job creation,” Crowell said. The shift from the former model to the new one will begin this year and end in 2018. For many years, large businesses have had to pay a 1.5 percent tax on their payroll expenses.

On some level, anger about the Twitter tax break is really anger about much bigger issues like inequality and changes that are happening in the city as tech wealth explodes. “They’re natural tensions,” said Gaby Peña, a Twitter employee who lives in the Mission District. “As a city evolves, there’s always some people who will want it to stay the same, some people who will want it to change. So long as each community finds commonalities and solutions as opposed to dwelling on the tension, I think we can go ahead.”