Boston could face a budget shortfall of up to $1.5 billion over the next five years due to declining commercial property tax revenue, according to a report released this week.
Evan Horowitz of the Tufts University Center for State Policy Analysis said the tax decline is expected due to the declining value of office space, which has seen a decline in demand across the country since the pandemic and the trend toward increased remote work.
“Office space is not as attractive as it used to be,” Horowitz said. “Boston has a lot of office space. If office space becomes less attractive, it becomes less valuable and you can't charge as much in taxes. So you're going to see the city collecting a lot less in taxes from office space over the next few years.”
The report, funded by the Boston Policy Institute, said the value of office space is expected to fall by 30% by 2029, creating a new normal in which annual tax revenues will be roughly $500 million lower than current levels.
What makes Boston different and especially vulnerable, Horowitz said, is how dependent it is on commercial property taxes: Other big cities like New York, Houston and Chicago derive between 5% and 15% of their revenue from commercial real estate such as office space.
“we [in Boston] “The city collects over 35 percent of its total revenue from commercial establishments,” Horowitz said, “and one of the reasons we're so much more reliant, at least one of the key reasons, is that the state doesn't allow cities to do much else. Cities don't have the authority to institute local sales taxes or local income taxes. And their ability to institute new taxes is very limited.”
This is a policy that sets Boston apart: One of the report's recommendations is to give the state Legislature the power to impose new taxes on Boston.
Boston Mayor Michelle Wu, along with other mayors, is lobbying Beacon Hill to pass a bill that would allow cities to impose their own local-level real estate transfer taxes.
Policy options proposed in the study include increasing direct government assistance.
In a written statement, Boston Assessor General Nick Ariniello downplayed the financial threat to the city.
“While we cannot comment on a report we have not yet seen, there are no indications that the real estate market will result in a loss of revenue for the City,” Ariniello said. “Massachusetts' system of property assessment and property tax collection is set by state law and structured to provide local governments with a level of stability not found in other jurisdictions across the nation. That is why the City has been able to remain fully operational and provide services to its residents during an unprecedented global pandemic, while cities in other states have faced dramatic budget cuts.”
Arniello said this stability is a factor in the AAA bond rating the city has received for the past nine years.
“We don't believe the current real estate environment will lead to budgetary concerns, but we are keeping a close eye on it,” he said. “A vibrant downtown and a strong mix of commercial and residential real estate are among the elements that help make Boston a world-class city.”
Horowitz said the city was right to question the size of the shortfall projected in the report, but said the city's confidence was “completely hard to believe.”
“It's surprising that we don't see anything in the real estate market that will impact tax revenues,” he said.
Horowitz said it's true that the way Boston assesses commercial property values every few years largely protects the city from cyclical economic ups and downs.
“But this isn't a cyclical problem,” he said. “This is a whole different kind of problem. … Nothing is going to insulate the city from the new reality that office buildings are worth less than they were before.”
While some commercial real estate has remained largely vacant since the pandemic, the state has also faced a housing crisis, leading to a push to convert office space into residential units, but Horowitz said that still doesn't solve the tax problem.
“We charge higher rates [tax] “Tax rates for commercial buildings are higher than for residential buildings, so when you convert from one to the other, you automatically lose a lot of tax revenue because the building has to pay a lower tax rate,” Horowitz said. “But even worse than that, we give huge tax incentives for years and years for people to convert buildings to housing, so every time you do that, you lose all of your taxes on that building, or a large portion of your taxes, for a long period of time.”
Horowitz said the report emphasizes the need to take steps to avoid a vicious cycle in which “fewer taxes mean worse city services, and worse city services make the city less attractive, which leads to lower prices. And so we end up in this vicious cycle.”
He said a solution will eventually come about because no one wants that to happen.
“It may take some time, it may require a lot of fighting, but I don't think there's any will to make the city worse,” he said.