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San Francisco Supervisors Pass 'Twitter Tax Break'

Now they have to decide whether to change the payroll tax

San Francisco lawmakers approved the mid-Market "Twitter tax break" on Tuesday in a near-empty board chamber, drawing an anticlimactic close to a debate that had polarized the city for two months.  The legislation freezes payroll taxes along the mid-Market corridor for six years, a move supervisors hope will keep Twitter's headquarters in San Francisco.

The Board immediately moved onto the next, thorny question: What should San Francisco do with the rest of its startups that are threatening to leave because of the city’s payroll tax?

Supervisor Mark Farrell introduced legislation Tuesday that would amend the payroll tax code to no longer consider stock options as employee compensation. Since 2004, the city has defined options as payroll to be taxed at 1.5 percent. But only now, as a handful of high-profile tech companies like Twitter and Zynga prepare for their initial public offerings, has the tax emerged as a concern.

In recent weeks a handful of companies including Twitter, Zynga, and Yelp have pressed city officials to amend the tax, saying they would rather relocate than stay in San Francisco and absorb a huge tax hit in the event they go public and their shares soar in value.

A study conducted by budget analyst Harvey Rose found that San Francisco was the only city in the nation that taxed stock options, Farrell said.

“The hard truth of the matter is San Francisco is a complete outlier on the issue that needs to be corrected,” Farrell told the board. “It’s not a minor tax or a little issue, it’s a major problem.”

There has been broad political support for amending the payroll tax. Farrell, Supervisor Ross Mirkarimi and Board President David Chiu all taking part in a “tech council” comprised of industry executives, venture capitalists and tax lawyers and convened by city officials to discuss possible solutions. The council met for the first time on Monday.

But supervisors disagree about how to change the tax.

Mirkarimi introduced a similar measure last month that exempted the payroll tax for pre-IPO companies, but for only for a two-year window. Farrell warned on Tuesday that Mirkarimi’s temporary fix would amount to “kicking the can down the road” and would create uncertainty, which businesses loathe. (Chiu is also developing similar legislation.)

Mirkarimi responded by labeling Farrell’s legislation “an unknown quantity.” City economists have not calculated how much tax revenue San Francisco would lose with a stock option exemption, Mirkarimi said.

“We’ll never know how much it’ll cost the city,” Mirkarimi said, adding that his legislation would only target young, private companies and buy time for the city to more finely calibrate its tax structure.

“Ours has an accountable population for a discreet amount of time,” he said. “That enables us to define the impacts. It targets companies that are IPOs and we can study that.”

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