Bill will ease the tax burden on homeowners

By Samuel R. Tyler

Changes in the existing property classification law are needed to restore the maximum tax share borne by business to its traditional level, and to delete a significant flaw in the language that may result in homeowners paying additional property taxes this year, even when residential housing prices are stagnant.

In just a few months, the City of Boston is due to set new property tax rates for the current fiscal year. What the final tax rates for residential and business property will be, and what share of the total tax levy residential and business property will pay will depend both on assessed property values as of Jan. 1, 2007, and what steps the Legislature takes regarding pending bills on property classification.

Classification of property in Massachusetts allows the city to determine, within limits, the share of the annual tax levy borne by residential and business property. Municipalities with split tax rates were allowed to reduce the residential share of the tax levy to 50 percent of its share of the total taxable value and increase the business share of the levy to 175 percent of its share of taxable value. That would mean that the business property share of the tax levy would be 75 percent higher than it would be if the City had just one tax rate and the business and residential shares were equal to their shares of taxable value. Boston sets its property values following state authorized practices that, for example, do not allow it to set the value of commercial office buildings based on sale price.

Boston has always shifted as much of the tax burden as is allowed onto business property to benefit residential property owners. As a result, in fiscal 2007, business property represented 32 percent of taxable value but paid 58 percent of the tax levy. Residential property represented 68 percent of taxable value and paid 42 percent of the tax levy. Homeowners who occupy their home also enjoy the significant benefit of the residential exemption, which represented a $1,525 decrease in their taxes last year.

For many years prior to fiscal 2004, business and residential values followed a relatively similar trend and their share of the tax levy hovered at a 70 percent to 30 percent split respectively. However, in fiscal 2003 this trend started to shift due to economic forces, particularly the high rate of residential property growth, the slowing of commercial property values and the City reaching the maximum the tax levy could shift to the business ceiling of 175 percent.

In fiscal 2004, faced with very divergent residential and business property value trends that threatened to increase residential tax bills in Boston by as much as 40 percent, legislators passed temporary legislation (Chapter 3 of the Acts of 2004) to shift the business classification factor or ceiling from 175 percent to 200 percent of its share of total taxable value that year. The law required the business ceiling to be reduced each year until it was restored to its original factor of 175 percent in fiscal 2008 and be further reduced to 170 percent in fiscal 2009. This legislation originated from a compromise reached among state and local officials and business leaders that did not include the final reduction to 170 percent. Businesses agreed to the original plan to help mitigate the large property tax increase faced by homeowners at the time. Since then, business has been paying a larger share of the tax burden than otherwise would have been required.

Classification should be restored to its pre-2004 status to let the business and residential tax levy shares and tax rates be determined more naturally by the changes in the real estate market. Making the business ceiling a permanent 175 percent in fiscal 2008 will honor the original compromise, restoring the ceiling to its traditional level from last year's level of 183 percent. Making the 175 percent permanent would prevent the business ceiling from being reduced to 170 percent the next year as the law now requires, which would put more tax pressure on residential properties.

Language in the 2004 act that prohibits the residential class from bearing a lower percentage of the tax levy than the percentage imposed in the prior year should be deleted. Retaining this arbitrary restriction would mean that homeowners may pay additional property taxes at a time when residential housing prices are stagnant or declining. Without change, the business share of the tax levy would not increase even though commercial property values are appreciating, especially downtown office properties.

Mayor Menino has submitted legislation (H3119) that effectively addresses both of these recommendations and the Research Bureau supports this bill.

Samuel R. Tyler is president of the Boston Municipal Research Bureau, an independent agency which provides oversight to the city's policy decisions.

We need permanent tax protection for residents

By Shirley Kressel

The residential property tax emergency continues, with no end in sight. Didn't that 2004 legislative "relief package" Mayor Tom Menino promoted help us?

No, it was a temporary "band-aid," he acknowledged, and it just spread the pain over five years. It's winding down.

Further, as the Boston Municipal Research Bureau delicately puts it, "Due to language inserted in the 2004 legislation as it was enacted," - i.e., tucked in by businesses after the agreement was negotiated with public officials - there are two time bombs in it that are about to explode, if we don't take immediate action.

A simplified history of how we got here: In the beginning, property taxes were calculated simply: The City assessed each property's value, and divided the total levy to be raised by the total property value in the city to get the tax rate for every property.

In 1978, the state let municipalities choose to implement "classification," allowing the residential and commercial "classes" of property to be taxed at different rates. The goal was for the commercial class to cross-subsidize residents.

The commercial rate was set at 1.75 times the basic rate. But it was capped there. Whatever share of the levy commercial taxes wouldn't cover, residents would have to pay - our tax rate would float to fill the levy. So, commercial owners, though they paid a higher rate, were protected. There was a limit to their rate. But residents' rates were unlimited.

There was more. The residential owners had usually ended up paying about 30 percent of the total levy, and the commercial, about 70 percent. This 70 percent became a ceiling on the share of the levy commercial properties can pay. So, if their total share of the levy at the capped tax rate exceeds the 70 percent ceiling, their tax rate is cut.

The 30 percent became a floor on the share of the levy residents must pay. So, when housing values tumble, residential rates are raised to make up for them. Commercial owners don't have to fill the levy when home values fall.

When commercial property values drop, their total tax contribution simply falls below 70 percent of the total levy because their rate is capped. Residential rates are raised to make up for lower commercial taxes.

In sum, commercial owners are protected by both a rate cap and a levy share ceiling. Residents absorb the tax risk for real estate busts, and don't benefit from booms.

When the 2001 recession depressed the net income of big commercial buildings, residents, with our inflated home prices, faced a 40 percent jump in taxes in 2004.

Politicians, fearing a backlash, made a deal with the big commercial owners, who stepped up as civic leaders to save the residents. The commercial cap rose temporarily from 175 percent to 200 percent, and ratchets back down by 2008, shifting the burden to the residents again. Thus, the residential levy share has risen 78 percent in five years, while the largest commercial properties' taxes decreased, despite record occupancy, rents and resale prices.

But - bomb number one - the cap will fall in 2009 to 170 percent, lower than it started - a permanent commercial tax cut and residential increase. In FY 2007, residents are carrying over 42 percent of the levy. By 2009, the residential share will likely be at 50 percent.

Bomb number two is far more devastating. It doesn't allow the residential levy share to go down once it goes up! It can't go back to 30 percent. Thus, thanks to the business leaders' last-minute "insertions" into the 2004 "relief package," residents would end up bearing at least half of Boston's property tax burden permanently, even as commercial value grows and home values slump.

The city has filed for a repeal of the 2004 legislation. The businesses, exposed in their effort to turn their 2004 legislative "rescue" of homeowners into an enormous and permanent windfall at residents' expense, are now kindly supporting this reversion to the previous status quo, to reestablish trust.

But we should not accept. We should use this moment for real reform - the "system overhaul" Mayor Menino advocated when he testified for the 2004 band-aid.

"Classification" has been forcing residents to subsidize commercial property. Enough. We need legislation to:

• Eliminate any residential floor and commercial ceiling. Shifts in aggregate class value should simply result in commensurate shifts in shares of the tax burden, just as it does among individual properties. Why should residents absorb the risks for office towers' boom-bust cycles?

• Float the commercial rate, using it to make up for the difference in the commercial and residential "market-value" capture and achieve the intended residential benefit of classification.

The net-income method mandated by state law results in assessments that average only half the value of sale prices of big commercial properties, while residential assessments are tracking 95 percent of sale prices - yet another advantage enjoyed by the commercial class.

The Research Bureau states that residential property represents 68.5 percent of Boston's taxable value but pays only 42.4 percent of the tax levy, while business property represents only 31.5 percent of the value but pays 57.6 percent of the levy. However, when the assessment-method differential is factored in, the business value is almost doubled, and this class is barely paying its basic share, much less the purported classification cross-subsidy.

The unfair imbalance of levy share between commercial and residential properties requires immediate legislative remedy. It will happen only if residents demand it.

Shirley Kressel is the founder of the Alliance of Boston Neighborhoods, a citywide coalition of civic associations.