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Updated Feb. 8, 2011 at 11:43 p.m.

In a move designed to coax Twitter, the booming Internet startup, to relocate into a blighted section of downtown San Francisco, city officials announced on Tuesday a proposal to freeze payroll tax increases for businesses located along a stretch of Market Street and in the Tenderloin district.

The legislation, which is interim Mayor Edwin M. Lee’s first major policy piece since taking office last month, would exempt growing businesses from paying additional payroll taxes on new hires for six years. The tax exemption would apply only to a zone that spans mid-Market Street, from 6th Street to Van Ness Avenue, as well as a 30-square-block swath of the Tenderloin.

“Twitter’s global appeal and growth in the last few years in our South of Market neighborhood has given an enormous boost to our local economy,” Lee said in a statement. “The proposed Payroll Tax Exclusion for Central Market and the Tenderloin will help keep Twitter’s headquarters here, bring jobs to San Francisco and help transform and revitalize the Central Market corridor."

Currently, businesses with payrolls of over $250,000 pay a tax of 1.5 percent. Under the legislation, any new business that is started within the zone will not pay any payroll taxes.

The bill was tailored for Twitter, which currently employs roughly 300 people but has outgrown its Folsom Street offices. Last month, the startup reportedly looked into a 200,000-square-foot complex vacated by Wal-Mart in neighboring Brisbane. But San Francisco officials have been keen to retain a startup that they project will expand tenfold, to 3,000 employees, over the next 10 years.

The city is hoping that the terms of the tax break will entice Twitter to move into an office space between 9th and 10th streets to anchor the southwestern end of mid-Market Street, the rugged, raggedy tract lined by porn emporiums and empty storefronts that the city has tried — and failed — to revitalize for decades.

The board must still vote to approve the measure, although City Hall officials say its passage is all but certain. Twitter has yet to announce its plans.

City officials argued that offering the tax break would bolster the city economy in the long run, even if it forgoes some tax revenues in the short term. The mayor’s Office of Economic and Workforce Development projected that once the tax freeze is lifted, the additional tax that Twitter would begin to pay on its projected 3,000 would equal $4 million.

Jane Kim, the lead board sponsor of the legislation, emphasized that freeze would not be a “long term solution” and that it would be deficit neutral. The bill was co-sponsored by board President David Chiu.

“We want companies to continue paying what they’re paying right now,” Kim said. “But if a company wants to grow, we’re not going to penalize that, especially if they’re coming to a neighborhood that’s been distressed for decades.”

Even before this proposal, businesses that wanted to open up in the mid-Market district were eligible for a host of state and local tax breaks.

Mid-Market, the Tenderloin and the location of Twitter's existing office on Folsom Street are all part of San Francisco's Enterprise Zone. The  tax credits and benefits for businsses operating in the zone are substantial.

Firms can earn $37,400 or more in state tax credits for each qualified employee hired, carry forward their operating losses for 15 years for tax purposes, earn sales tax credits on purchases of $20 million per year for qualified machinery and parts, and depreciate their equipment up front to further limit their tax liability.

In 2008, records on file at the California Franchise Tax Board show, businesses in San Francisco's Enterprise Zone received nearly $100 million in tax breaks.

San Francisco also already offers payroll tax exemptions for biotech businesses and companies that develop clean energy technologies.  

San Francisco also offers a refund on all San Francisco Payroll Tax and a portion of hotel and sales tax paid to the city during production of a feature film or television program.

The city's projected 2011-12 budget deficit is $379.8 million.