SAN FRANCISCO (CBS/BCN/AP) — The San Francisco Board of Supervisors approved a tax break Tuesday to keep Twitter from fleeing the city.

The measure passed 8-3 exempts the micro-blogging service from paying payroll tax on new hires if it moves to the city’s neglected Mid-Market area.

”This is a tax policy designed to revitalize neighborhoods in San Francisco that have been blighted for decades,” said Board of Supervisors President David Chiu, who was also one of the measure’s sponsors.

The exemption applies beyond Twitter, to any business in the Mid-Market or Tenderloin neighborhoods, on or near Market Street between Fifth Street and Van Ness Avenue. But city officials called Twitter the big fish that could spur economic growth.

Twitter is already outgrowing its current San Francisco headquarters in the city’s South of Market neighborhood, and the company is poised to expand from a few hundred to a few-thousand workers.

While seeking a building with more office space, the company had said it had considered moving down the Peninsula to a city that has no payroll tax.

But last month, Twitter signed a letter of intent to sign a six-year lease and move into the San Francisco Mart building on the southwest corner of Market and Ninth streets, contingent upon supervisors approving the tax break.

Soon after, Zynga, maker of social games like Farmville, indicated it would leave its San Francisco headquarters unless the tax break was expanded to include it. Other online companies like review site Yelp and real estate site Trulia indicated the payroll tax was among the reasons they were adding jobs outside of the city.

San Francisco is the only city in the state that charges companies a payroll tax; 1.5 percent of total employee compensation each year if the firm has more than $250,000 in payroll. The tax also applies to money made on stock options, a prime consideration for Twitter and Zynga which are both rumored to be exploring initial public offerings.

The payroll tax debate came at a time when the city’s high tech startup scene teems with energy not seen since before the first Internet bubble burst in 2000.

John Avalos, Ross Mirkarimi and David Campos were the three supervisors who voted against the legislation. The critics called the plan an ill-conceived corporate giveaway that would lead other companies to issue ultimatums demanding similar treatment.

“I worry that we set the wrong precedent,” said Avalos, who predicted that the measure would result in many more companies asking for tax exemptions and could take businesses away from other areas of the city.

The city’s largest union, Service Employees International Union (SEIU), also opposed the legislation, arguing that wealthy companies didn’t need tax breaks.

The measure was supported by the Chamber of Commerce, which maintaned the tax cuts help job development in an area of the city where half of the office space is vacant.
The Chamber’s view was ultimately echoed by the board’s majority.

“We finally have a chance to put into place a policy that will bring economic development and jobs. This ordinance offers hope to revitalize a long neglected part of our city,” said Supervisor Jane Kim, another of the measure’s backers.

Mirkarimi, a member of the board’s progressive wing, had proposed a two-year moratorium on payroll taxes on stock options for all city companies as an alternative to the Twitter deal.
The legislation passed Tuesday will require Twitter and other larger companies in the area to enter into agreements with the city outlining actions the businesses will take to benefit the surrounding community.

The agreements are intended to assuage concerns of low-income residents worried that an influx of businesses could raise rents and price them out of the neighborhood, as happened in other parts of the city during the first dot-com boom.

“We want some assurance that the people will not be displaced,” said neighborhood resident Jesus Perez, 31, who attended the board meeting to show his opposition. “All the property is going to start climbing up.”

Under city rules, the full board will vote again on the measure as early as next week before it goes to the desk of Mayor Ed Lee, who is a backer of the tax break and is expected to sign it into law.

(Copyright 2011 by The Associated Press.  All Rights Reserved.)