(Bloomberg) -- Boston homeowners face a 28% surge in their tax bills if the Massachusetts legislature fails to sign off on a proposal to temporarily raise commercial rates before the end of next month, Mayor Michelle Wu said.
The city is particularly vulnerable to the nationwide slump in office demand because of its heavy reliance on property tax revenue and state restrictions on its ability to tap other funding sources. That’s forced Boston to develop a workaround in an attempt to preserve its budget without burdening homeowners with the brunt of the revenue shortfall from commercial property taxes.
Commercial property values in Boston have fallen 7% in the current fiscal year, reflecting high vacancy rates in older and lower-quality office buildings amid the persistence of pandemic-era remote and hybrid work policies, Wu said in a presentation Wednesday. The numbers are based on a preliminary assessment that’s subject to change as the city reviews parcel-by-parcel data in the coming weeks.
The decline in commercial property values isn’t as stark as the mayor’s office had initially estimated, in part because of resilience in retail and hotel businesses. Still, the 28% quarter-to-quarter increase in residential property rates that would be required to compensate for the commercial shortfall is significant, Wu said.
She said her proposal to temporarily increase the city’s rate ceiling for commercial properties relative to residential levies is meant to ease some of the sticker shock for homeowners and smooth out their bills.
“When there are shifts and swings within either residential or commercial values, that can have a big impact,” Wu said. “We want the environment to be predictable for residents and for businesses.”
The Boston office market is stabilizing, albeit at an elevated total vacancy rate of about 23%, according to third quarter data from Colliers.
The Massachusetts House of Representatives approved the tax shift in late July — mere days before the end of the formal legislative session — after Wu agreed to reduce both the maximum rate increase for commercial properties and the duration of the adjustment. The Senate has yet to follow suit, sparking criticism from Wu, who has said Boston residents should blame the chamber if their taxes increase.
Possible Deadline
The proposal likely needs to pass by late November to avoid the spike in residential rates, Wu said.
While she said she’s open to other tweaks to the tax adjustment, she rebuffed suggestions by business leaders that Boston instead trim its budget or refrain from raising overall property levies by the full amount allowed annually under state law, calling those options “financially irresponsible.”
Boston would need to cut about $265 million in spending to make up for the drop in commercial property values, comparable to the fire department’s budget or the equivalent of more than 2,000 jobs citywide, Nicholas Ariniello, commissioner of the assessing department, said in the presentation.
Separately on Wednesday, the Greater Boston Chamber of Commerce hosted a forum highlighting risks to the competitiveness of Massachusetts as a whole in the face of efforts by research and technology rivals – including North Carolina, Texas, Florida and California – to pull talent and capital out of the commonwealth.
State Competitiveness
Jim Rooney, who heads the chamber, said he recently led a tour of North Carolina’s Research Triangle, which includes Raleigh, and discovered the rallying call was how that hub “can become the new Boston in biotech.”
The state’s labor force today remains smaller than its pre-pandemic peak, in part due to a doubling in the out-migration of those age 26 to 35, according to the Massachusetts Taxpayers Foundation (MTF), a near-century-old association that last month released its first annual competitiveness report on the state.
High housing costs and poor transportation infrastructure are key disadvantages for the state, said Doug Howgate, the MTF president. While there’s no quick fix, he urged state policymakers to use the tax code and regulations to incentivize towns and cities to green-light more housing.
“Tax policy moves the needle,” Jane Steinmetz, managing principal at the Boston office of accounting firm EY, said at the forum. “In six months, you can send a different message to the business community.”
Healey on Taxes
Howgate also called on the state to take a holistic approach in using proceeds from a new 4% surtax on taxable incomes over $1 million approved via a ballot initiative in 2022, using the funds for education and transportation in ways that maximize competitiveness.
Governor Maura Healey said in an August interview with Bloomberg that “I’ll be honest about what’s happened” with that surtax, amid claims that it could lead to departures of high net worth individuals.
“I need to make this place as competitive as possible,” she said, highlighting that the revenues have helped to fund initiatives including free community college.
(Updates with takeaways from Wednesday forum on state’s competitiveness in 12th paragraph.)
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