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BOSTON (State House News Service) — Boston Mayor Michelle Wu's proposal to shift a greater tax burden onto commercial property owners to limit increases on Boston residents is a temporary solution that may exacerbate the longer-term problem it is trying to solve, according to the author of a new report on the policy.
Wu's plan -- which needs approval from the city council and then the Legislature to take effect -- seeks permission to tilt a bit more of the city's property tax burden onto commercial owners instead of residential owners for a few years.
The mayor says her plan protects residential property owners from larger increase in taxes due to declining commercial values.
As the world has shifted in the wake of the COVID-19 pandemic, fewer and fewer companies have returned to downtown offices. Without a bustling workforce in downtown and other neighborhoods, small businesses such as restaurants and retail have also suffered and commercial properties are likely to see a reduction in values in this year's assessment.
State law allows municipalities to create separate tax rates for commercial and residential property, and to require commercial owners to pay as much as 175 percent of what the rate would have been without a split.
Wu's proposal would allow the city to increase the maximum commercial shift to 200 percent if business property values drop significantly, then gradually shift it back down a bit each year until it returns to 175 percent in year five. She says this shifting would safeguard residents from an unexpected and dramatic property tax increase, if they had to bear the weight of city budget growth without as much revenue coming in from commercial properties.
"In the short term, this is the legislative mechanism that is necessary," she said last month, discussing her plans on WBUR. "In the long term, we need to recruit more businesses to Boston and [provide] more residential opportunities."
Ryan LLC, a tax firm that represents commercial and residential property owners, in a new report released Wednesday says the policy would increase the commercial tax rate by 14 percent, and the increased rate would further depress commercial values.
"It is difficult to make sense of a bill that looks to increase taxes on a class of property that is decreasing in market value while further subsidizing a class because of its appreciation in market value. It is extremely difficult to make sense of such a proposal when factoring in that Boston already has the second highest level of disproportionality between commercial and residential taxpayers in the country," the report says.
The report says Boston has the third lowest property taxes out of major U.S. cities for residential homeowners, and the 11th lowest for apartment owners.
"This bill would increase the already exorbitant tax burden on commercial owners who are desperately attempting to hold onto properties through financial stress and losses caused by record-high vacancies and increased interest rates," the report says. "Boston should be reviewing ways to revive commercial properties through tax mitigation, not saddling them with additional disproportionate tax burden to reduce tax costs for a thriving class of property whose owners are continuing to increase their wealth."
Under the current layout, businesses hold a third of Boston's property value, to 66.7 percent is held by residential properties. Of property taxes, however, 58.3 percent is paid by businesses compared to 41.7 percent from residents. Wu's proposal would shift even more of that weight onto commercial property owners.
The mayor has said the proposal is only temporary, to give homeowners protection and the real estate market time to stabilize.
"As Boston invests in revitalizing our Downtown and commercial corridors in response to shifting market trends, we are working with all stakeholders to protect residents and homeowners against sudden and dramatic tax increases," she said in a statement. "For our seniors on fixed incomes, for families with children, for frontline workers and all our community members, we must have the tools to address rising housing costs and keep residents in their homes."
Daniel Swift, principal at Ryan and author of the report, says increasing taxes on already-struggling commercial owners will make the vacancy issue even worse -- further exacerbating declining property values.
"This problem is about a decline in commercial real estate. That's what's causing these negative consequences. And this policy by itself furthers the decline of commercial real estate from an assessment perspective," Swift told the News Service. "Vacancy keeps increasing, and there's not going to be, from my perspective, a quick bounceback in commercial real estate. So if the policy itself is further depreciating value on the assessment side, the residential class is going to be left with a much larger portion of assessed value -- and a greater tax levy at the end of the day."
Wu has pointed to similarities between her proposal and a temporary tax policy former Mayor Thomas Menino was able to secure in 2004 as part of the city's reaction to the dot-com bust's impacts on the city's real estate.
A Boston Municipal Research Bureau report analyzes Wu's property tax classification compared to Menino's 2004 tax shift. The report says the bill 20 years ago was meant to provide temporary relief while a market "anomaly" played out, but that in 2024 there's no indication that commercial real estate will bounce back to pre-pandemic levels.
"What's happening is not a traditional economic cycle," said Marty Walz, interim president of the Research Bureau. "It's more likely a structural change in how we live and work. The mayor's proposal on property taxes is an approach that lasts only a few years, but the changes in the market may be long term changes. So we need to think of this not as a short term, cyclical economic cycle, but as a more permanent structural change in the market."
The Research Bureau report includes recommendations that the city could consider as an alternative, including revenue diversification. Property taxes fund about 71 percent of the city budget -- a high amount compared to other large U.S. cities.
Meg Mainzer-Cohen, president and executive director of the Back Bay Association, said she is concerned about commercial property owners passing the tax hike onto tenants who are already struggling to maintain small businesses.
She said one of the members of the association who owns several restaurants in the Back Bay said it would take $100,000 off their bottom line.
"It's hard for a business, without any warning, to incorporate a year over year increase of $100,000," she said. "For the properties that have been vacant, how those property owners are going to absorb an additional tax is very concerning. The broad sense is that the Back Bay has been a fairly dependable economic engine for the city, and we're concerned about entering a cycle that hurts the neighborhood's vitality and economic success -- which directly relates to jobs and the area losing some of its vibrancy."
The Boston City Council Committee on Government Operations held a hearing on the petition in April, and another hearing has been scheduled for May 30.
Written by Sam Drysdale/SHNS.
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