We do not yet know the fate of the “big, beautiful bill” (BBB) that President Trump is pushing in Congress, but we know what the effect will be if it is passed, and it will be devastating to Massachusetts. It will involve a reduction in property and income tax revenue, as well as massive cuts that will affect the state and city budgets. If he prevails, the leadership skills of the mayor and governor will be tested in ways we haven’t seen in decades.
In April, I proposed ten questions to ask candidates for mayor of Boston in candidate forums. Those questions relate to challenges facing city neighborhoods that are regularly discussed at civic and neighborhood association meetings across the city. They include development and comprehensive planning (BPDA and ZBA), schools, climate, health care, the Carney Hospital, etc.
But that column was produced before the president’s direct attacks on the Massachusetts economy. As a result, I am adding an eleventh set of questions for the mayoral election (it should also be considered for next year’s gubernatorial election):
In the event of a major meltdown of the Massachusetts and Boston economy that results in, say, a half-billion fewer dollars in revenue per year for Boston, how will you balance the city’s budget, what do you consider to be essential and expendable, and can you cite innovations that could preserve essential services and programs and lower cost in the event of a budgetary crisis?
Trump’s efforts to destabilize or crush higher education and eliminate major funding for health care and research represent economic warfare against our state. The Massachusetts economy is based on “meds and eds,” that is, health care and education, and that combination results in a robust research economy. Our largest employers are our health care systems and universities. Major layoffs, which are already starting to happen, will reduce income tax revenue.
The Medicaid cuts alone in the BBB ($793 billion, plus $268 billion in cuts to Obamacare) would be a budget buster. Medicaid currently provides care to over a million Massachusetts residents, and 78 million nationally. Gov. Healey’s office estimates that the BBB would cut $1.75 billion from MassHealth, resulting in more than 250,000 Massachusetts residents losing coverage. (In addition to Medicaid cuts, Medicare is likely to be cut by about $500 billion due to a provision in budget law that automatically cuts Medicare if the deficit increases.)
The state would undoubtedly have to take action, as more than half of Massachusetts hospitals are running deficits. Legislators could re-create the Free Care Pool to restore coverage, but that would increase the premiums on private health insurance, already among the highest in the US. The cuts would also likely destabilize the remaining community hospitals, which are already financially at risk. Failure of more of these hospitals would also increase the overall cost of medical care by removing this source of lower cost care.
Another major cut is in the SNAP program (aka Food Stamps), which serves 1.2 million Massachusetts residents, resulting in more hunger issues for our residents. These are just the major BBB cuts. They will trickle down to every city and town in the Commonwealth. We’re also losing tourist taxes (many foreigners are boycotting the US). And then we have the loss of Boston’s commercial property tax revenue.
Property taxes drive every part of our city government. A June 5 report by the Boston Policy Institute projects that tax revenue from commercial property in Boston could decline by between $1.4 billion and $2.1 billion over the next five years due to a 35 to 45 percent loss of assessed value. Commercial property produces two-thirds of Boston’s property tax revenue, which makes up 70 percent of Boston’s annual budget.
Why Classification and Prop 2 ½ Matter
Property taxes are affected by assessed valuation of property (how much the city determines it is worth), what type of property it is (residential, commercial or industrial), and the “Prop two and a half” requirement that the increase in the tax levy is limited to 2 ½ percent per year, plus any new property that is added to the overall valuation of all real estate in the city.
First, assessed valuation: This is set by the city based on the market value of property, which can be determined by how much similar properties sell for in the marketplace, though this can be affected by speculation and other factors. Residential real estate values generally increase every year. Owner-occupied residences can have their taxes reduced by near $4,000 due to the “residential exemption” that excludes a certain amount of the value of the property from taxation.
Second, classification: A question on the 1978 general election ballot passed by the voters changed Massachusetts’ constitution to allow the creation of a classification system for property into four types: residential, open space, commercial, and industrial. Each of these types of property can have different rates that determine how property is taxed. In Boston, residential properties are currently taxed at $11.58 per $1,000 of valuation and commercial and industrial property are taxed at $25.96 per $1,000 of valuation. The taxation number has changed somewhat over the years, but generally commercial and industrial rates are between two and three times the residential rate.
But that doesn’t mean that your property taxes cannot go up more than two and a half percent. It means that the total property tax yield for the property of an entire city or town cannot go up more than two and a half percent unless there is an override passed by the voters of that city or town. The overall total tax yield can go up by 2 ½ percent, but if the commercial value goes down the residential rate goes up. Think of it like a balloon. There’s a maximum amount of air in it, but if you push down on one side, the other side goes up.
The total revenue tax levy also increases by new growth, i.e., new and expanded buildings and condo conversions. It is this provision that results in mayors wanting to see new construction and often becoming enamoured of developers. Union contracts can take all the 2 ½ percent increase in the tax levy, so mayors need new construction to prevent layoffs or add staff and initiate new programs. It’s the major source of new money.
But commercial construction is down, and extant commercial buildings are losing value due to occupancy rates tumbling. This is why the continued lowering of assessed value of commercial property can be disastrous to Boston’s budget, and result in significant tax increases in residential properties.
With commercial property losing value, the amount of new construction down, and dramatic federal cuts to the major sources of jobs and revenue in Massachusetts, we need to be making plans for the potential impacts on the state and city budgets. A major cut in Medicaid will reverberate into all parts of the state budget, especially education, the second largest part of the state budget.
This is more than preparing for a rainy day. It will require bold leadership for an unprecedented financial crisis. It can also be an opportunity for the talented innovators in our state to work on ways to preserve medical and educational programs and services while reducing their cost.
In the meantime, we have important elections this year and next, and important questions to ask those who wish to lead us.
Bill Walczak, a Dorchester resident, is president of the Columbia-Savin Hill Civic Association. His column appears regularly in The Reporter.
