Boston is likely to face up to a $1.5 billion budget shortfall over the next five years as a result of declining commercial property tax revenue, according to a report released this week.
The study’s author, Evan Horowitz of the Center for State Policy Analysis at Tufts University, says the drop in taxes is expected because of the decreasing value of office space. Since the pandemic and the increasing trend of working remotely, the dropping demand for office space is being seen around the country.
“Offices are not as desirable as they used to be,” Horowitz said. “Boston’s got a lot of offices. If those offices are less desirable, then they are worth less and you can’t charge as much in taxes. And therefore, the city is going to collect a lot less in taxes on those offices in the coming years.”
The report, which was funded by Boston Policy Institute, says the value of office space is expected to decline as much as 30% by 2029, creating a new normal of annual tax revenues roughly $500 million below the current level.
What sets Boston apart and makes the city particularly vulnerable, Horowitz said, is how reliant Boston is on those commercial property taxes. Other major cities like New York, Houston and Chicago collect between 5 and 15% of their revenue from commercial properties like office spaces.
“We [in Boston] collect over 35% of our total revenue from commercial properties,” Horowitz said. “And the reason we’re much more dependent — one key reason, anyway — is that the state doesn’t allow the city to do much else. The city doesn’t have the authority to introduce a local sales tax or a local income tax. And it’s very constrained in its ability to introduce new taxes.”
That’s a policy that sets Boston apart. One of the report’s recommendations is that the state Legislature grant Boston the authority to introduce new taxes.
Boston Mayor Michelle Wu, along with other mayors, has been lobbying Beacon Hill to pass legislation to allow cities to impose their own local-level real-estate transfer taxes.
The policy options suggested in the study include increased direct aid from the state.
In a written statement, the commissioner of Boston’s assessing department, Nick Ariniello, downplayed the financial threat to the city.
“While we are unable to comment on a report that we have not seen, we have not seen any indications from the real estate markets that would translate to a loss of revenue to the City,” Ariniello said. “The system for valuing real estate and collecting property taxes in Massachusetts is established by state law and is a structure which provides municipal governments with a level of stability that other jurisdictions throughout the country do not have. This is why through an unprecedented global pandemic the City was able to operate fully and provide services to our constituents while cities in other states were facing dramatic budget cuts.”
Arniello credited that stability for the AAA bond ratings the city has received for the past nine years.
“Although we don’t feel that the current real estate environment is going to lead to budgetary concerns, it is something that we are keeping a close eye on,” he said. “A vibrant downtown and a strong mix of commercial and residential property is one of the things that helps make Boston the world class City that it is.”
Horowitz said it’s reasonable for the city to question the extent of the shortfall predicted in the report, but he called the city’s confidence “totally implausible.”
“The idea that they don’t see anything in the real estate market that would affect tax revenues is staggering,” he said.
It’s true, Horowitz said, that the way Boston assesses commercial property values every several years largely insulates the city from the cyclical ups-and-downs of the economy.
“But this is not a cyclical problem,” he said. “It’s a totally different kind of problem. ... It will not insulate the city from the new reality where office buildings are just less valuable than they used to be.”
With some commercial real estate sitting nearly empty since the pandemic at the same time the state faces a housing crisis, there’s been a push to convert office space into housing units. But even that, Horowitz said, doesn’t help with the tax problem.
“We charge a higher [tax] rate for commercial buildings than residential buildings. So if you convert from one to the other, you automatically lose a ton of tax revenue because now the building has to pay the lower rate,” Horowitz said. “But worse than that, we’re offering huge tax incentives for people to convert buildings to residential — for years and years and years. So any time you do that, you lose all the taxes on that building for an extended period of time — or much of the taxes.”
Horowitz says his report highlights the need to take steps to avoid a spiral “where declining taxes make the city services worse, and declining city services makes the city less desirable, which drives down prices. And you end up you end up in this ‘doom loop.’”
Because no wants to see that happen, he said, a solution will eventually materialize.
“It may take a while. It may take a lot of fighting, but I don’t think there’s any willingness to let the city fester,” he said.
