Watchdog says Boston should look to reserve funds, spending cuts before hiking commercial taxes

A CITY WATCHDOG is throwing cold water on Boston Mayor Michelle Wu’s proposal to raise tax rates on commercial property, saying the city should instead look to spending cuts, tapping reserve funds, and diversifying its sources of revenue as it contends with a likely drop in commercial real estate values from the resetting of office work patterns following the pandemic. 

The Boston Municipal Research Bureau, in a report issued on Thursday, urged the city to consider a broader range of approaches to the fiscal challenges rather than hiking taxes on commercial property owners who are already struggling with high vacancy rates. 

“Given the uncertainty of the economy and the recalibrating of the real estate market, and the key role that businesses and business property play in the City’s fiscal stability, now may not be the time to further burden business property owners and, by extension, their tenants, that include restaurants, retail shops, and small family-owned operations,” said the report from the business-funded watchdog group.  

In late March, Wu announced she would seek state approval to raise commercial tax rates beyond currently allowable limits in order to head off what she said would be “sudden and dramatic tax increases” in taxes on homeowners. 

The city is heavily reliant on property tax revenue, which funds nearly three quarters of its $4.3 annual budget. Under a state-authorized system known as tax classification, the city imposes a much higher rate on commercial property in order to soften the tax burden for homeowners. 

Commercial property taxes account for nearly 60 percent of all property tax revenue, even though commercial property accounts for only a third of total property value in the city. 

City officials are concerned that high office vacancy rates – driven by the move to hybrid work schedules – will translate to lowered assessments on commercial properties and a decrease in the tax revenue they generate. With commercial tax rates already at the highest level allowed under state law, city officials say they would be forced to significantly raise the residential tax rate to maintain city spending levels. Under a home-rule petition filed by Wu, which must be approved by the City Council and then the state Legislature, the city would be allowed to temporarily raise commercial tax rates to blunt the increase in residential tax rates. 

In its report, the research bureau pointed to several alternatives to a commercial tax hike that the city could consider. The group said this would be the time to tap some of the nearly $1.2 billion in reserves that the city maintains. That sum, the report said, is equal to 29 percent of the annual city budget, well above the 15 percent benchmark set by the city. 

The report also called for spending restraint on the part of the city, saying the “substantial increase” in the proposed 2025 budget stands in contrast to the approach taken by then-Mayor Tom Menino 20 years ago when the city faced a similar situation and won approval from the Legislature for a temporary commercial tax rate increase. 

The report called for further controls on school spending at a time when enrollment has declined sharply, and it called for “effectively managing employee levels” after a decade that saw the city workforce increase by 7.6 percent, or the equivalent of nearly 1,300 full-time positions. The report said the city should also explore “revenue diversification,” though it noted that establishing other sources of tax revenue will likely require state approval through a home-rule petition and is “not an overnight solution.” 

The city did not respond to a request for comment on the report.

The new report follows an analysis released in February by a new watchdog group, the Boston Policy Institute, which said declining commercial real estate values could mean an annual budget shortfall of $400 to $500 million if Boston takes no action to reset tax rates. The report, prepared by the Center for State Policy Analysis at Tufts University, projected a 20 to 30 percent decline in office real estate values by 2029. 

The new report from the municipal research bureau projected the impact of a 10 percent decrease in commercial values, accompanied by a 5 percent increase in residential home values. If residential tax rates were increased to compensate for the revenue loss from the drop in commercial values, the report said, it would mean an increase of 16.5 percent, or $910, in the tax bill for the average single-family home. 

The head of NAIOP Massachusetts, which represents commercial property owners, previously  decried the move to raise taxes on commercial property while the sector is struggling. “This is essentially being viewed as kicking them when they’re down,” said Tamara Small, chief executive of the organization, last month. “This is really just going to exacerbate the value loss property owners are seeing.” 

Last month, the city released its 2025 budget plan, which calls for an 8 percent increase in spending. In reaction, Marty Walz, the interim president of the Boston Municipal Research Bureau, called it “disappointing” that there were no “spending reductions to ameliorate the impact of the mayor’s proposal to increase property taxes.” 

Wu said at the time that the city departments were already struggling “to get the job done” and are “going above and beyond” to deliver services.