Boston could lose $1.4 billion in tax revenue over the next five years due to vacant office space, according to a new report released Wednesday by the Boston Policy Institute.
The city could face an ongoing funding shortfall of about $500 million per year beyond the first five years, according to the report.
The analysis, conducted in collaboration with Tufts University's Center for State Policy Analysis, is examining the economic impact of vacant office space in the city.
High interest rates and the post-pandemic shift to remote and hybrid work have depressed commercial real estate values, according to Evan Horowitz of the Center for State Policy Analysis at Tufts University.
“The shift to remote work means fewer people coming into the office, and since there's no reason to expect office work to return, this labor shortage will continue,” Horowitz said.
(Courtesy of the Boston Institute for Policy Studies)
Horowitz said cities across the U.S. are experiencing this trend, but Boston is especially reliant on commercial property tax revenues: More than a third of Boston's tax revenue comes from commercial property taxes, the highest percentage of any major U.S. city, the report noted.
Boston is “particularly dependent on this revenue source and therefore especially vulnerable to price declines in the commercial sector,” Horowitz said. These taxes help pay for vital city services.
Because property taxes are based on the assessed value of buildings, when commercial property values fall, so does potential tax revenue. In the worst case scenario, this could lead to a downward spiral, according to the report.
Horowitz said political leaders are not to blame for the situation, but they must work to address the expected shortfall.
“This is an economic force majeure,” Horowitz said. “It's something that happened to us, and we have to respond to it, not a failure of the decision-makers.”
The report points out several possible solutions. One option would be for the state to provide aid directly to the city of Boston. Another would be for the Legislature to give Boston the option to impose a local sales or congestion tax on drives into downtown. Other cities are able to impose local sales or income taxes, making them less reliant on property taxes, the report noted.
Other solutions include raising taxes on commercial and residential properties, but Horowitz said that would make commercial properties “less attractive” and would hit residents hard.
The report comes as Boston tries to transform its downtown by helping fill vacant storefronts with new businesses, as well as a broader effort to attract more people to the area for reasons other than commuting.