Tony Bennett may have left his heart in San Francisco. Twitter may swipe everything else.
Officials in San Francisco last week approved a 6-year exemption from what the San Francisco Chronicle dubbed “city’s growth-killing payroll tax” for new employees. This is a big deal because Twitter is expanding its workforce from 300 to about 2,000 and is considering a move to suburban San Bruno. For its part, Twitter is mum it will take the city’s offer.
San Francisco taxpayers probably will end up on the losing end of this deal. Governments usually do because businesses know they are desperate for jobs and they squeeze them for whatever concessions they can get. Many deals done with government help, though, just don’t work out as expected.
In 2007, Mississippi officials gave Toyota Motor Corp. (NYSE:TM) some $300 million in incentives to build a plant in their state, which has yet to produce a single car because of the economic slowdown. Corollas are expected to begin rolling off the assembly lines later this year. The plant was originally expected to be operational in 2010. In a stunning bit of optimism, state officials have a 10 year time frame to wait for a return on their investment.
In 2008, Evergreen Solar opened a plant in Devens, Mass. thanks to $20 million in cash from the state along with “$1 million in workforce training money, $7.5 million in investment tax credits and a long-term lease on state land valued at $2.7 million,” according to the Sentinel and Enterprise. In January, Evergreen Solar said it would close the Devens plant and move its operations to China. The plant employed 800 workers.
Tasty Baking Co., a maker of snack treats enjoyed by generations of Philadelphians, had fallen on hard times in 2007. After threatening to leave Philadelphia for the suburbs, officials from the city and state of Pennsylvania provided the company with a $32 million so that it could move into a “tax-free zone” at the Philadelphia Navy Yard. Tasty Baking continued to struggle despite the help it received from taxpayers because of unexpected “operational challenges” in operating the new state of the art facility at the Navy Yard. In January, it announced it was looking at several options to reverse its decline including a sale of the company.
Twitter’s potential deal with San Francisco carries with it just as much risk as the other ones discussed here. Though Twitter is a huge success — a $3.7 billion valuation — whose to say where it will be in six years? Will it be even bigger than it is today or will it flame out like one-time web darlings such as MySpace and Friendster? No one knows the answer to this question, least off all the bureaucrats at the city of San Francisco.
Though Twitter’s offer centers on payroll taxes, the company is sure to what consideration for real estate taxes and whatever other levies it can get San Francisco to wave. It sets an awful precedent. Once one business gets this sort of deal, others from food carts to multinationals will want the same.
Moreover, San Francisco can’t really afford it. San Francisco’s budget deficit is projected to hit $787 million in 2012 , up from $483 million in 2010. The costs of the Twitter deal could not be determined.
In these tough economic times, local officials should think long and hard before giving taxpayer aid to any business, even a cool one such as Twitter.