Resolution of property tax dilemma puts mayor, council in fretful mode

Four years into economic recovery from the pandemic, city officials are still trying to figure out how to flatten the curve on future property taxes while working to convey enough urgency to get legislative help from the State House without sounding too much alarm.

At a virtual hearing May 30, the City Council’s Government Operations Committee gathered testimony on how the curve might be affected by a home rule petition proposed by Mayor Wu. If approved by the council and at the State House, the measure could temporarily smooth out a possible spike in tax bills on residential property, triggered by an expected slump in assessed values for some of Boston’s commercial property—especially less desirable “class B” and “class C” office space.

Even the optics of the hearing told the story: Instead of a single spacious Iannella Chamber proceeding, participants could behold a jump-cut montage of screens, with different faces shown in different settings. On one screen, a councillor holds forth from the passenger side of a motor vehicle, strapped in place with a seatbelt while a brick streetscape behind her reels off into the distance. Even when a councillor is backgrounded by City Hall’s Brutalist concrete, the once-familiar expanse of the chamber shrinks to little more than the confines of a cubicle.

In the age of remote connectivity and smart phone commerce, scattered-site testimony can render a single physical venue less a functional necessity than a ceremonial frill.

Applied to office space and accelerated by the pandemic, the same repositioning has affected real estate values in cities around the country – and how the resulting property tax burden is split between commercial and residential classes.

Wu’s proposed adjustment of the split is similar to the modified version of what had been filed by former Boston Mayor Thomas Menino, which was approved by the state in 2004. At the time, Boston’s residential values were on the rise and commercial values were either flat or slumping. Instead of paying a 41 percent jump in the property tax bills, the adjustment allowed residential owners to start with an increase of only 14 percent.

If the adjustment sought by Menino had been a temporary fix for a temporary problem—partly caused by a passing economic downturn, Wu’s proposed home rule petition would address a change that some believe is less reversible.

Among those making that point during the council hearing was Matthew Osborne, executive VP and chief credit officer for Eastern Bank.

“This is a paradigm shift, certainly for the foreseeable future,” he told the committee, “and that makes this market disruption very different from the tech crash that we saw in the early 2000, around 2001, and the great financial crisis of 2008. You know, Boston bounced back quite strongly from those events, and quickly. But, with the change in work patterns, it’s highly unlikely we’re going to see that bounce-back this time without some structural changes and changes to some of these properties.”

Currently, commercial property in Boston can be taxed up to 175 percent of its assessed share of the levy. Under Wu’s measure, the figure could increase to as much as 200 percent before a gradual return to the normal maximum over the next four years. If the measure is adopted, the city would have three years in which to apply the change.

According to the Boston Municipal Research Bureau, keeping the current limits would increase the average tax bill for a single-family home by 16.5 percent or $910 in the fiscal year ending June 30, 2025. If the city were to apply the new maximum levy on commercial property, the Bureau estimated in a recent report, the increase over the same period for residential property would be 2.5 percent or $138.

Daniel Swift, a principal with the global tax consulting firm Ryan LLC, estimated that the new maximum rate for commercial property would “directly decrease the assessed value for the commercial class by billions of dollars,” shifting even more of the value share – and tax burden – onto residential property.

Swift’s figure and scenario were disputed by the city’s commissioner of Assessing, Nicholas Ariniello. Officials in the Wu administration have noted that, even with the new limits, some commercial properties with declining values could end up with lower tax bills. But, during the May 30 hearing, councillors were cautioned that other commercial properties would be hit with higher taxes, often paid directly by commercial tenants.

The president and executive director of the Back Bay Association, Meg Mainzer Cohen, warned that businesses would be “hit enormously” on Newbury Street, an area with a much lower rate of commercial vacancies than Downtown Crossing.

“What I’m saying is that the successful districts in the neighborhoods, because of the lack of vacancy, the city will assess those based on occupancy and based on the leases that they have, and it will be passed along to the people who are less able to absorb the inflationary costs of other goods and services along with this,” she said, “so we do think that this is going to do a lot more harm, and I think there are going to be a lot of unintended consequences.”

The interim president of the Boston Municipal Research Bureau, Marty Walz, predicted similar problems in other business districts in Boston’s outlying neighborhoods.

“This is a cost increase to operate in the city for restaurants, retail shops, nail salons, barber shops, convenience stores, on any nonprofit organization that’s a tenant in a commercial building,” she explained, “so this is going to have an impact on every small business, large business, every commercial property, whether it’s in East Boston, Hyde Park, Allston, Brighton, and everywhere in between.”

To ease the burden under the classification measure, Walz suggested using a bulk rate for commercial property somewhere below the maximum that would be allowed.

Officials in Wu’s administration agree that could happen, but that a decision would have to be made after property values are calculated, near the end of 2024 – at least four months after the measure could be acted on this year in a normal legislative session at the State House.

“We would have all of those options and we would be able to figure out what that right balance point is,” said Ariniello, “which I think leads a lot into what people have brought up today, which is this concept of shared sacrifice and how we shouldn’t be pitting one group against another.”

While vacancy rates have been rising for Boston’s commercial property, the Municipal Research Bureau found that, since 2020, the average single-family tax bill has already gone up by almost 44 percent. And the residential tax burden—for owners and renters—was highlighted in testimony from organized labor and grassroots organizations.

“Our service workers,” said Tom McKeever, president of SEIU, Local 888, “cannot afford a dramatic increase in property tax or rent and continue to either live in the city they love or provide support through their valuable contributions to the city.”

Ariniello noted that without a change in tax rates allowed by the home rule petition, the full FY 2024-25 tax increase for residential owners would appear on the two quarterly bills that would be due in the first half of next year, adding up to a 32 percent spike that would have to be paid within 30 days.

“And so, all of a sudden that plays an enormous amount of risk with people’s ability to come up with money that they have not budgeted for,” he said, “and it kind of gives me heart palpitations just thinking about it.”

According to the city’s chief financial officer, Ashley Groffenberger, that was why the mayor wanted the home rule petition to be enacted before the tax bills are sent out.

“If we don’t have this flexibility,” she told councillors, “we will have a very-narrow-to-no timeline available to us to get this in place if we see commercial values decline in such a way that we see a 17-or-higher percent increase in residential taxes.” And she emphasized that allowing the commercial levy to go as high as 200 percent of assessed value was a ceiling, not a floor.

“Personally, I think that being in the middle is a good idea,” Ariniello suggested, “but I wouldn’t change the legislation as proposed. I think that the time for figuring out that right level is when we actually know what the property values are, and we actually know what the potential consequences are going to be.”

District 3 City Councillor John FitzGerald argued that an increase in the commercial rate could do “irreparable harm” to Boston’s downtown core and neighborhood business, without sparing residential owners an eventual return to the normal tax differential.

But the executive director of the Mass. Affordable Housing Alliance (MAHA), Symone Crawford, told him that homeowners would need time to adjust.

“I think it would give me an opportunity to plan for the future,” she said. “Hopefully, the city by then would have some way to mitigate me having to pay more than I should at a later date.”

Reports by the Municipal Research Bureau and the Boston Policy Institute have drawn attention to Boston’s heavy reliance on property taxes as a share of its revenue base, making a case for more diversification of revenue. Groffenberger credited the dependance on property taxes with enhancing the city’s rating for municipal bonds, though she did not rule out remedies in addition to the classification measure.

“This particular thing is one solution for one particular issue,” she acknowledged, “but there is so much work that the city is engaged in to ensure that we are doing what we can to ensure that our local economy is vibrant and preserves value.”

The Municipal Research Bureau report suggested other ways to relieve the burden of the tax shift, including a slowdown of city spending increases—especially in the Boston School Dept., and an increase in the exempted value for owner-occupants of residential property.

Administration officials countered that an increase in the exemption would shift the burden onto other residential owners, as well as their tenants. They also said a reduction or slowdown in spending wouldn’t necessarily change the city’s tax levy.

And, Ariniello said, if the levy were to fall short of the maximum annual increase allowed by Proposition 2½, catching up later to the full increase allowed would require a spike in taxes.

Officials questioned the practicality of other suggested remedies—giving relief to some residential owners by tapping the city’s reserve funds and allowing an exemption to the tax on personal property used by businesses. Ariniello said there was no way to make sure that relief from the exemption would go to businesses that do not own the property where they operate.

At the beginning of the hearing, the chair of the Committee on Government Operations, District 1 Councillor Gabriela Coletta Zapata, declared herself “generally supportive” of the mayor’s proposal. At the end of the hearing, she put more emphasis on trying to flatten the curve in sentiment on the council.

“The very least we can do, again, going back to what I said earlier,” she said, “is limit the policy harms and explore and exhaust all of our options. I’m interested in producing something that the council can opt into, and just demonstrating to our small businesses that we are thinking of them and we’re doing everything we can to limit the negative impacts to their business operations.”

Four days after the hearing, Wu and her top aides modulated from urgency around the classification measure to highlighting signs of Boston’s economic recovery. According to the Boston Planning and Development Authority’s annual report on the state of Boston’s economy, released on June 4, there were positive indicators about employment, visitors, public safety, even spending and foot traffic in downtown areas.

In its report for the first quarter of 2024, the commercial real estate services firm Cushman Wakefield cited “continued softening market fundamentals” for Boston’s office space, with a vacancy rate of 17 percent, with rates around 19 percent for the Financial District and “Midtown/North Station.” But, in its outlook, the firm predicted that the expiration of “a slew of leases signed in 2017-2019” would lead to a “rebound” throughout the remainder of this year.

Subscribe to the Dorchester Reporter