City officials say the measure, which must be approved by the City Council and state legislature, is necessary to keep the city on a balanced budget and ensure homeowners don't face big tax hikes. It's similar to steps then-Mayor Thomas Menino took in 2004 to cushion the blow to homeowners when the city's office market took a hit after the dot-com bubble burst.
But while all council members agreed on the need to maintain stability for homeowners, some, including leaders of industry and policy groups, worried that further increases in commercial property tax rates could have a negative impact on small businesses and the economic outlook for the downtown area.
“How do we make sure we're acting fiscally responsible,” said City Councilwoman Erin Murphy, “while not putting additional strain on already struggling commercial properties and businesses downtown, because people are already struggling to continue to live in the city, so that's a balance we have to work on together.”
Property taxes make up about three-quarters of the city's annual budget, and Massachusetts communities are legally required to maintain a balanced budget, so a significant drop in commercial property values can mean a corresponding increase in residential property tax rates to make up the difference.
The city already uses split tax rates to reduce the tax burden on homeowners, and about two-thirds of the city's property tax revenue comes from commercial property. Homeowners pay a tax rate of $10.90 per $1,000 of assessed value, while businesses pay $25.27 per $1,000 of assessed value.
Local governments with split tax rates have set a tax cap on commercial property compared to residential property. Wu is considering raising the cap on commercial property and lowering the minimum tax rate on residential property for up to five years.
If the measure is approved, the city would have a three-year opt-in period to implement it.
“We want to give you a little bit of time to absorb the change in commercial values so you're not hit all at once,” Boston Chief Financial Officer Ashley Grofenberger told the Government Operations Committee. “We're not asking for permanent change, we're simply asking for additional flexibility to mitigate the impact over a period of time and avoid a dramatic rate shock for our residents.”
The move comes in response to a report released earlier this year by the Boston Policy Institute and Tufts University's Center for State Policy Analysis, which found that Boston could lose $1.2 billion to $1.5 billion in tax revenue over the next five years if office values fall by 20 to 30 percent.
Industry group leaders voiced opposition to the proposal on Tuesday, saying the tax hike could exacerbate the office vacancy problem facing the market and hurt the economic vitality of the downtown area.
“This is a problem that's been building for years, and unfortunately the Wu administration has allowed it to come to a head right now,” said Greg Basil, CEO of the Greater Boston Association of Realtors. But the move “is probably great for all the other communities around Boston, because it gives them another reason not to do business in Boston.”
“A thriving commercial real estate sector means a stronger city budget, not an additional tax burden on the city's already struggling office and retail sectors,” James E. Looney, president and CEO of the Greater Boston Chamber of Commerce, said in a statement Tuesday.
City officials said that when Menino enacted a similar measure in the early 2000s, homeowners ended up paying about 14 percent more, rather than raising property taxes by more than 40 percent.
“It served exactly that purpose,” Nicholas Arniello, chairman of the city's assessment department, said Tuesday, insisting that no commercial businesses were harmed. “We believe it's an appropriate measure in this moment. We're trying to do something that doesn't put an undue burden on one segment of society and that will bring stability to everyone.”
But Marty Waltz, interim director of Boston's Department of City Research, said the approach that worked in 2004 may not be the right solution for a 2024 situation that has been fundamentally changed by the pandemic and the shift to remote work.
“This is probably not a typical economic cycle where prices and values go up and down and then rise again in a fairly predictable way. We're living in a new world,” Waltz said. “In 2004, there was a reasonable expectation that the real estate market would recover. But right now the outlook is not as clear. … What happens if, a few years from now, commercial real estate values continue to stagnate and residential real estate values continue to rise?”
Grofenberger pointed to several initiatives city officials are undertaking to invest in the downtown sector and help it adapt to a post-COVID world, including efforts to convert commercial space into residential apartments and offering grants to small businesses to fill vacant storefronts. He said the city is prepared to take additional steps if commercial property values continue to fall.
“We're going to learn a lot over the next 12 months, which is why we've created this flexibility to give us the opportunity to address issues as they arise,” Groffenberger said.
But Walz and some City Council members stressed the importance of looking at ways to diversify the city's revenue sources so Boston isn't so reliant on property taxes. Walz also recommended looking at ways to “soften the impact” of these proposals on commercial businesses, such as through budget cuts.
Wu last week unveiled a $4.6 billion budget proposal for next fiscal year that would increase city spending by 8%, or $344 million.
“I'm not here today to advocate for massive budget cuts, but raising taxes at the same time that spending increases significantly sends a message of a lack of fiscal restraint,” Walz said. “There is no message of shared sacrifice. The message of this proposal is essentially one of selective sacrifice, where certain people would be asked to pay more.”
But Groffenberger said the city explored that option but ultimately rejected it.
“The negative, or even significant, damage to the city from cutting hundreds of millions of dollars would outweigh the benefit in terms of tax rates,” Groffenberger said.
Niki Griswold can be reached at niki.griswold@globe.com. Follow Niki Griswold.