May 24, 2024

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Boston Eyes Commercial Tax Hike to Counter Office Market Dip

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Boston Mayor Michelle Wu is seeking to raise commercial property tax rates to help protect homeowners from the brunt of the historic slump in office property values.

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(Bloomberg) — Boston Mayor Michelle Wu is seeking to raise commercial property tax rates to help protect homeowners from the brunt of the historic slump in office property values.

Wu has submitted a petition for a temporary increase of the city’s tax-rate ceiling for commercial properties relative to residential levies. The proposal aims to redistribute the tax burden while continuing to fully fund all city services, according to Ashley Groffenberger, Boston’s chief financial officer. The tax adjustment won’t raise additional revenue for the city.

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“The proposal we put forward is really focused on creating stability and not having an outsize impact on residents,” Groffenberger said in an interview. 

The move would favor homeowners while potentially deepening the pain for commercial real estate amid a nationwide slump in office demand spurred by the rise of remote work. Boston’s fiscal health is particularly vulnerable to the decline, with more than a third of its tax revenue tied to commercial property taxes. By comparison, cities like Chicago, Miami, New York and Washington rely on such taxes for between 5% and 15% of their revenue.

Currently, commercial properties in Boston are taxed at a rate of about 2.5%, compared with around 1.1% for residences, according to an analysis by Tufts University’s Center for State Policy Analysis and the nonprofit Boston Policy Institute.

Read More: Manulife Faces 40% Decline in US Office Investments From Peak

Boston is facing a record vacancy rate, with almost a quarter of its 69 million square feet of Class A and Class B office spaces unoccupied, according to Jeff Myers, head of research at Colliers’ Boston office, citing data going back to the 1980s. 

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It’s against this backdrop that a plunge in the assessed value of Boston’s office buildings could necessitate a rebalancing of commercial and residential property taxes, said Groffenberger. She likened Massachusetts’ property taxation to a pie that remains constant in size, regardless of real estate value fluctuations. If commercial property values plummet without a corresponding tax adjustment, residential rates would have to rise.

Read More: Boston Faces $1 Billion Tax Deficit From Faltering Office Market

Evan Horowitz, executive director of Tufts’ Center for State Policy Analysis, said that while Boston’s tax structure has been effective for decades, “it doesn’t work now because it will give you rates that would cause a political firestorm.” 

Any attempt to raise taxes for homeowners would be highly unpopular, particularly in a city that’s already struggling with housing affordability, he said. On the other hand, increasing commercial property taxes could exacerbate the distress in the office market.

If the status quo persists and property rates stay at their current levels, Boston faces a more than $1 billion cumulative shortfall in tax revenue over five years, according to the Tufts and Boston Policy Institute report.

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Wu’s plan is modeled after a similar reclassification of property tax rates that occurred two decades ago to save homeowners from a massive tax increase after the burst of the dot-com bubble dragged down the commercial property market. 

“The fact that it’s rooted in precedent is helpful to understand that this is a powerful tool, but also a tool that will not cause the sky to fall,” Groffenberger said.  

One important difference between 2004 and 2024 is the prevalence of remote work, which may permanently curb the amount of office space that companies need. 

“This is really the most challenged office market on record for the city of Boston,” Myers said. “The pain is here, it’s going to get worse in the near term, and it’s going to put more pressure on those owners to find ways to save costs.” 

Read More: GE Bet on Being the Biggest, Then It Had to Break Up to Keep Up

Mitchell Moss, an urban policy and planning professor at New York University, warned that Boston’s unique geographical context heightens the risk of driving businesses and property owners to alternative locations for office space, such as nearby Cambridge, Massachusetts — a separate but very close-by municipality with plenty of vacant office space, too. 

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GE Vernova Inc., the energy business spun off from General Electric Co. this month, put its new headquarters there. Before the breakup, GE was based in Boston. The remaining GE Aerospace jet-engine business will be based in Cincinnati, Ohio.

“You don’t raise taxes on an industry which is suffering because you’re going to make it less competitive,” Moss said.

The mayor’s proposal allows for a three-year window to implement the changes to commercial and residential property rates, giving the city the opportunity to respond to the actual financial impact once building valuations have been calculated for tax purposes.

Property values in Boston are assessed as of Jan. 1 for the fiscal year that begins in July.

“The core of this is insuring residential affordability,” Groffenberger said. “What’s good for residents is good for the whole city.” 

(Updates with assessment dates in second-last paragraph)

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