Shifting Work Patterns May Impact Commercial, Residential Tax Rates
APRIL 2, 2024…..State lawmakers could soon be asked to approve Boston Mayor Michelle Wu’s proposal to have commercial and industrial property owners shoulder a greater share of the city’s property tax levy to try to shield residential property owners from having to pay more to make up for declining commercial property values.
State law allows municipalities to create two separate property tax rates and to shift a portion of the property tax levy onto commercial properties, with a maximum shift of up to 175 percent of what the commercial share would have otherwise been.
Wu said last week that she will soon file a home rule petition to raise the maximum shift to 200 percent if a significant drop in commercial assessments occurs. The shift would gradually step down and return to a maximum of 175 percent by the fifth year of the process.
The Boston Policy Institute and the Center for State Policy Analysis at Tufts University released a report showing that remote work and high interest rates combine to form an “economic act of God” that puts Boston at risk of losing a chunk of its tax base by the end of the decade. The report estimated that Boston could face a cumulative commercial property tax shortfall of $1.2 billion to $1.5 billion between 2025 and 2029.
While Wu’s bill aims to solve challenges in Boston, the dynamic behind the problem could be present in other communities.
“The pandemic changed the way we work, and that has had a rather sudden and significant impact on commercial tax bases,” Massachusetts Municipal Association Executive Director Adam Chapdelaine said. “In affected communities, one potential outcome is crushing property tax increases for homeowners, while commercial properties see a reduction. Already tightly constrained by the limits of Proposition 2½, affected cities and towns may want to pursue thoughtful, measured approaches like Mayor Wu’s proposal to avoid making the region’s housing cost crisis even worse.”
In its announcement, Wu’s office said her latest proposal is similar to legislation that the late Mayor Thomas Menino got passed in early 2004 to enable about 50 communities with dual tax classification rates to raise commercial property taxes more than was allowable at the time. Wu’s office said her proposal “builds on this precedent.”
Menino and other mayors pushed for the legislation, saying the situation was the result of a combination of soaring residential values, stagnant commercial values, and a statutory cap on commercial property taxes.
“This is an anomaly,” Menino told a five-member special commission charged with studying the problem and solutions in late 2003. “This will never happen again.”
Wu’s office said the mayor’s proposal — which would need to pass the Boston City Council before going before the Legislature for its approval — could be implemented in a city election during any of the next three fiscal years. The mayor’s office said that timeline “would allow the City the ability to initiate the alternative rate schedules only when absolutely needed.”
Martha Walz, the interim president of the Boston Municipal Research Bureau, said that 73 percent of Boston’s operating revenue comes from property taxes. In fiscal 2024, the city has gotten 58.3 percent of its property tax revenue from business properties and 41.7 percent from residential properties. Business property makes up 33.3 percent of the property values in the city and residential property makes up 66.7 percent, Walz said.
“It is prudent to consider the impact of potential increases in residential property taxes on homeowners as well as renters who may face higher rents as landlords pass along higher costs to their tenants,” Walz, a former state rep from Boston’s Back Bay, said. “It is equally important to consider the impact of this proposal on commercial property owners and to explore how the city could cushion that impact on commercial property owners who would be asked to pay more in taxes than they would otherwise pay.”
Greg Vasil, CEO of the Greater Boston Real Estate Board, suggested last week that city and state officials should instead focus on ways to make the city more attractive to businesses of all types to keep tax revenue flowing.
“Commercial buildings and their values are in an unsettling downward transition period in our post-Covid world. We are deeply concerned that increasing commercial tax rates to recoup lost revenue will only take us closer to the urban doom loop being seen in many other American cities,” he said. “Businesses have carried a tremendous fiscal burden for the city and pushing them harder at a time when their buildings have lost value is fiscally irresponsible. This is a time unlike any other in the last 30 years, and piling more financial burdens on a struggling industry is no solution at all.”
