Property Tax Hike on CRE Proposed to Close Boston Budget Gap

To offset the decline of office property values—which in turn is creating looming budget gaps for the city—Boston’s mayor has proposed to raise the property tax rate ceiling for commercial properties while leaving the rate unchanged for homeowners.

Mayor Michelle Wu is petitioning for a temporary increase of the city’s tax-rate ceiling for commercial properties, to be phased in over three years, aiming to redistribute the tax burden while continuing to fund all city services.

Boston is facing a tax revenue deficit of nearly $1B in the next five years from plunging commercial property values that are expected to drop by 30% or more before the end of the decade, according to a recent report from Tufts University’s Center for State Policy Analysis and the non-profit Boston Policy Institute, Bloomberg reported.

More than a third of Boston’s property tax revenue comes from commercial property—a much higher share than other large metros—making Beantown much more vulnerable to shortfalls created by a cliff dive in office values. Currently, commercial properties in Boston are taxed at a rate of about 2.5%, compared to 1.1% for residences.

According to Boston’s chief financial officer, Ashley Groffenberger, an increase in the CRE tax rate won’t increase the total amount of tax revenue Boston is collecting but will offset the need to raise residential property taxes in order to close the looming shortfall created by declining commercial property values.

Wu’s plan is based on a similar tax burden restructuring that was implemented in Boston 20 years ago to protect homeowners from a tax increase in the wake of the dot.com collapse.

“The proposal we put forward is really focused on creating stability and not having an outsize impact on residents,” Groffenberger said, in an interview with Bloomberg. “The core of this is insuring residential affordability. What’s good for residents is good for the whole city.”

The added tax burden will increase the pain for commercial property owners who are struggling to compete in an office market that, according to Colliers, is facing a record vacancy rate of 25%.

The availability rate in Boston’s CBD office market rose for the eighth consecutive quarter in Q1 2024, increasing to 23%, a 90 bps jump from the fourth quarter and surge of 350 bps in a year-over-year comparison, according to a market report from Savills.

Available sublease space in Boston’s CBD jumped to 4.5M SF in Q1, up from 3.7M SF in Q4 2023, the report said.