As the city of Boston desperately searches for ways to lower housing costs for its residents, a proposal to increase commercial property taxes continues to spark fierce debate.
Mayor Michelle Wu introduced the proposal in April after the COVID-19 pandemic led to a drop in tax revenues due to a decline in commercial property values. To avoid a spike in taxes that homeowners would have to pay to make up the difference in the city's tax bill, Wu proposed raising the share of the tax bill paid by commercial properties.
“This measure is about stability and residential tax relief,” Boston Chief Financial Officer Ashley Grofenberger said Thursday during a City Council Government Operations Committee hearing. “This measure will help guide all taxpayers, businesses and residents into a new normal. … We ask that Boston residents give themselves time to adjust to a new normal in which commercial real estate contributes less to the city's tax base than it does today. We are asking for cooperation in slowing the pace of this transition, not to block it forever.”
Under state law, local governments are allowed to set property tax rates annually and impose up to 175% of the tax on commercial property owners.
Boston currently has a maximum tax rate of 175%. Wu's proposal, which would require approval from the state legislature before it can take effect, would allow the city to temporarily raise rates to 200% and then lower them to normal levels over the next five years, lowering residential tax rates to 45% of assessed value from the current minimum of 50%.
Boston City Assessor Nick Arriniello said it's difficult to say how much the average property tax bill will change because property assessments for this year have not yet been completed.
The change could come into effect in any of the next three fiscal year city elections, but Wu, who was not at Thursday's hearing, said the city could make the change only if necessary. The city could also raise the commercial tax burden rate below 200 percent.
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According to the independent Boston Bureau of Statistics, residential property will account for about 67% of the city's assessed value in 2024, but only 41.7% of the taxable amount.
Since the proposal was announced, it has drawn strong opposition from Boston's business and real estate communities, who argue it would unfairly burden commercial property owners and their tenants who are already struggling as a result of economic changes caused by the pandemic.
“This isn't just an issue downtown, and it's not just an issue for commercial office building owners. This concerns every commercial property in the city and almost every tenant in those commercial properties,” said Marty Waltz, interim president of the Boston Municipal Research Department. “Commercial property owners pass the costs on to their tenants in almost every lease agreement, so this translates into increased operating costs for the city's restaurants, retailers, nail salons, barber shops, convenience stores and every nonprofit that is a tenant in a commercial building.”
Dan Swift, president of Boston-based tax firm Ryan, argued the proposal would hurt homeowners rather than help them.
In a recent report written for Ryan, Swift predicted that higher commercial tax rates would significantly reduce the value of commercial property, resulting in them paying less tax and forcing residential property owners to pay more to make up the difference.
Swift's report also found that Boston has the third-lowest residential property taxes among large U.S. cities and the second-largest disparity between residential and commercial tax rates.
“The higher the commercial tax rate, the lower the commercial assessed value,” Swift said. “This measure is [commercial property sale prices] “The increased costs of increased taxes will drive down market values and hinder efforts to retain and attract businesses to millions of square feet of vacant land. This will negatively impact existing businesses, regardless of size, in every neighborhood throughout the city. The result will be a significant reduction in the commercial value allocation, which will in turn result in a significant increase in the residential tax allocation.”
“I strongly oppose it,” Ariniello said.[d]However, I cannot agree with this view.
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“I really don't see this resulting in that level of property value loss, if any,” he said. “The way appraisals are structured and the way properties actually sell is very different than the overall cost of most properties. We're not a big factor in their overall cost.”
Councillor John Fitzgerald said he was unsure about the effectiveness of the proposal, noting that tax rates would return to normal over five years, meaning relief for struggling home and apartment owners would eventually run out.
“Probably in two years they're going to be faced with whatever this incremental measure is to cover their share of the residential tax bill,” he said. “This proposal doesn't solve that problem, but at the same time it could potentially cause irreparable harm to our commercial properties, our downtowns and our small businesses.”
But housing and labor advocacy groups who spoke at Thursday's hearing largely strongly supported Wu's proposal, saying the housing crisis and lack of affordable housing would be made worse if residents had to worry about higher taxes.
Simone Crawford, executive director of the Massachusetts Affordable Housing Coalition, said her organization has seen a big increase in homeowners seeking help: Attendance at its homeowner classes, which offer discounts on homeowner insurance to those who complete them, has risen from about 50 to 60 people per class last year to 200 to 250 this year, she said.
“Implementing an exorbitant tax at this time would only exacerbate the crisis homeowners currently face with the rising costs of maintaining their homes,” Crawford said.
The tax burden would affect not only homeowners, but also renters, who could see their rents rise as landlords try to make up for losses from the higher taxes. Union leaders who spoke at the hearing said their members are already struggling to pay rent in Boston.
Mark Bernard, executive director of the American Federation of State, County and Municipal Employees Council 93, wrote in a letter read at the hearing by union president William Chaisson that the union owns a nine-story office building on Beacon Hill and would be negatively affected by the tax changes, but that “the personal finances and household finances of our members are far more important to us.”
“As a union that represents workers who are bound to residency requirements as a condition of employment, I can assure you that these workers are already struggling to afford the high costs of owning or renting a home in the city,” Bernard wrote. “While property tax increases undoubtedly affect homeowners, property tax increases ultimately affect renters as well, as landlords pass on the increases to their tenants.”
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According to Councillor Liz Bredon, this may already be happening.
“We're already getting calls from tenants saying their landlords are dramatically increasing rents in anticipation of this change,” she said. “Some landlords are saying they see this as an opportunity to take advantage of the situation by inflating rents, which is quite worrying.”
Waltz said alternatives to Wu's proposal could include setting the cap at 185% instead of 200%, using financial reserves to help homeowners struggling to pay their taxes or looking at ways to cut city spending to reduce the tax bill altogether.
“Some have suggested the solution to this problem is big budget cuts,” Walz said. “We're not going to be able to cut our way out of this, but we can slow the rate at which our budget grows.”
She also said the city should consider diversifying its revenue sources, an idea supported by other council members and city council members. Boston currently relies on property taxes for about 71.1% of its revenue, according to the Bureau of Research.
Ariniello said lowering the top tax rate would be counterproductive because the proposal already allows cities to set tax rates below 200 percent and lowering that number would only prevent them from raising rates if they deem it necessary.
At the end of the hearing, Councilwoman Gabriella Coletta, chair of the Government Operations Committee, suggested the city institute a small business property tax exemption to mitigate potential tax increases for small commercial property owners.
Boston already has an exemption for homeowners, and state law allows an exemption for small businesses as an option for local governments, so it would not need legislative approval.
Coletta said city staff estimates such an exemption would reduce the city's revenue by less than $6 million.
“It might only be a small amount for us, but it could be a lifeline for these small businesses,” she said.
The full Legislature will vote on the tax changes at a later date, and if approved, they will then have to be sent to the state Legislature for approval.