Mayor Wu’s Commercial Property Tax Proposal: A Solution or a Snuff?
Boston Mayor Michelle Wu is considering shifting more of the property tax burden onto commercial property owners as a way to close a potential budget gap of $1.4 billion by temporarily increasing the commercial property tax rate to 200 percent of the residential rate. To do this, Mayor Wu would seek approval from the City Council and state legislature to allow Boston to temporarily exceed the 175 percent shift cap allowed by state law. It would then be phased out over a four-year period by reducing the rate by 7.5 percent annually.
When initially introduced, this local option higher property tax rate cap was intended to protect residential property owners from double-digit tax rate increases stemming from the steep rise in residential property values. Today, the situation is very different. The prevalence of remote work leaves many downtown offices vacant, reducing the demand for commercial space, the amount of rent commercial property owners can charge, and an overall decline in commercial property values. This translates to less tax revenue from commercial property owners and higher tax bills for homeowners.
While Mayor Wu’s instinct to shield her constituents from tax hikes when they are already facing inflationary pressures is understandable, her approach could do more harm than good over the long term.
Boston’s office market weakened considerably in 2023. According to Colliers 23Q4 Office Report, the office vacancy rate is almost 22 percent. At the end of 2023, the total amount of space available in Boston surpassed 16 million square feet and more than 50 office properties have at least half of their space available, a figure that has increased by 500 percent over the past four years. This trend could grow worse as many companies opt for less space when their lease is up for renewal.
Boston’s Chief Financial Officer Ashley Groffenberger has indicated the city does not need this new revenue to provide current services, stating “ Whether or not this measure passes or not, we are still going to collect the same amount of revenue and still be able to provide the critical city services that we provide in the city. We are really just seeking to give ourselves some runway to absorb that change.” If so, now is not the time to add new taxes on development. Construction costs are already exorbitant and the added taxes could lead to disinvestment in existing properties and curb new development. The number of permits issued for new development has plummeted, so new properties coming online cannot offset the decreasing valuation of existing commercial properties. In a recent Globe article, Doug Linde, president of prominent office developer and landlord Boston Properties said ”new speculative construction (i.e., construction started without a tenant preleased) “is nonexistent in the market today due to “dramatic increases” in construction costs.
It’s not like commercial property owners don’t already pay their fair share. Thirty percent of Boston’s tax revenues come from commercial property taxes, the highest percentage of any major city in the U.S. The commercial rate for FY2024 in Boston was 25.27 per thousand versus 10.90 for residential properties. Boston residents pay lower taxes than the average homeowner in Massachusetts. According to the Division of Local Services at the Department of Revenue, the average single-family tax bill in Boston was 32.8 percent below the FY2021 statewide average of $6,375.
Other options to close the potential budget hole should be considered, including more generous payment in lieu of taxes payments from tax-exempt properties (nearly half the parcel land area in Boston is tax-exempt), belt-tightening on nonessential services, and reducing the school budget that was the highest in the country for the 2020-21 school year at $31,397 per student. Longer term, creating incentives to bring more entertainment, leisure, retail, and residential to augment the tax base should be explored. A more balanced approach could pay dividends over time by protecting Boston’s vibrancy as a commercial hub.
