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Most of Boston's $4.3 billion budget is funded by property taxes, much of which comes from commercial buildings that are already taxed at more than twice the rate of residential properties. In municipalities with split tax rates, like Boston, state law limits how high commercial buildings can be taxed and how low residential buildings can be taxed. Wu wants to expand those limits, which he needs permission from the Legislature to do.
If commercial building values continue to fall, the city will be forced to choose between raising taxes on homeowners or making painful budget cuts, a choice Wu wants to avoid.
“This transition will stabilize the property tax system, maintain affordability, and provide a smoother and more gentle impact on value changes over a short transition period, resulting in a more sustained distribution between commercial and residential property owners,” Wu said.
Currently, the tax rate for commercial and industrial properties is $25.27 per $1,000 of assessed value, while the rate for residential properties is $10.90 per $1,000. It is unclear what the new tax rates would be if Wu's proposed autonomy petition passes.
The proposed changes come at a time when forecasts for office space in particular have rarely been more uncertain. A study published earlier this year by Tufts University's Center for State Policy Analysis for the Boston Policy Institute estimated that tax revenues from commercial real estate could be $1.2 billion to $1.5 billion lower over the next five years than previously projected. Just this week, an office building in downtown Boston sold for 36 percent less than it was in 2005.
Property developer trade groups said Wu's proposal, along with recent new fees and restrictions, risk scaring away builders at a time when construction and rentals are already slowing significantly in the city.
“We are deeply concerned that raising commercial tax rates to replace lost revenue will only bring us closer to the urban doom loop we have seen in so many other American cities,” said Greg Basil, CEO of the Greater Boston Association of Realtors. “This is a time unlike any other in the last 30 years, and imposing further financial burdens on a struggling industry is simply not the answer.”
“We need to take aggressive steps to ensure our downtown challenges and changing labor patterns don't exacerbate the housing crisis for our residents and homeowners,” Boston Mayor Michelle Wu said. Daniel Parizkaran/Globe Staff
Wu's proposal is similar to a similar measure put in place by then-Mayor Thomas M. Menino in early 2004, when the city's office market was struggling in the wake of the dot-com collapse and recession of the early 2000s. The temporary increase in commercial tax rates (which eventually expired) was coupled with a concentrated effort of new development and construction, particularly on the then-nascent South Boston waterfront.
Ricardo Patron, a spokesman for the city of Wu, said that without the changes, average property taxes for single-family homes would have increased by about 35 percent, while commercial property taxes would have fallen by about 15 to 20 percent. But in reality, residential property taxes only increased a more modest 15 to 18 percent, while commercial property taxes fell by just 5 to 8 percent, he said.
But the development environment 20 years ago was very different. Boston's commercial office vacancy rate is at its highest level in decades. New development proposals are shrinking, and few large projects in the city can get financing to start construction. Many developers say the economics of building housing in Boston just aren't viable right now.
“This will certainly further dampen enthusiasm for retail construction in Boston, but it may well result in very little retail construction at all,” said Ed Glaser, dean of Harvard University's economics department and an adviser to Wu.
Glaser said the measure could encourage more developers to pursue office-to-residential conversions. The city's conversion pilot program runs until June of this year, offering developers big tax incentives if they start construction on their conversion projects by October 2025.
Thomas N. O'Brien, a developer with Boston-based HYM Investment Group who served as director of the Boston Redevelopment Agency under Mr. Menino in the late 1990s, stressed that Mr. Wu's move must be accompanied by “some ideas about the potential for new growth and new projects.”
The city said it isn't concerned that declining property values could lead to less revenue, which is why it's seeking the rate increase.
“A decrease in value means an increase in tax rates, not a decrease in tax revenue collected,” Patron said. “The total amount collected is the same, we're just charging a much higher tax rate to collect it.”
Homebuyers are struggling with rising housing costs, so stability in housing taxes is crucial, said Simone Crawford, executive director of the Massachusetts Affordable Housing Coalition.
“This provision will help mitigate additional costs for residents while providing needed funding to the city,” Crawford said.
If city and state lawmakers approve the home rule petition, Wu's administration could implement the tax changes as early as July of this year or delay them until July 2025 or 2026. If implemented, the tax changes would last for four to five years. Doing it now gives the city flexibility to decide when to make the changes and if it really wants to make them, said Ashley Grofenberger, Boston's chief financial officer.
“We are taking this proactive step now to avoid causing anxiety to our residents,” she said.
While state law Proposition 2½ hard caps property tax revenue, Wu's proposal would give Boston more flexibility to adapt to a changing commercial real estate market, said Adam Chapdelaine, executive director of the Massachusetts Association of Municipalities and a former Arlington city manager.
“This gives local governments the ability to control how property taxes impact their residents,” Chapdelaine said. “This should be a core ability, a core flexibility, that local governments are given.”
Contact Catherine Carlock at catherine.carlock@globe.com. Follow her Follow.