Boston Mayor Michelle Wu has recently submitted a home rule petition aimed at adjusting the property tax structure to shift more of the tax burden from residential to commercial properties while easing the tax obligations on residential property owners. This proposed legislation has sparked a great deal of debate and confusion regarding its potential impacts and the current property tax system in Boston. This paper seeks to clarify the structure of Boston's property tax, the health of its property tax revenue, the burdens faced by commercial and residential property classes, and the potential consequences of this legislation if enacted.
I. Boston Property Tax Levy – Current Framework
To grasp the implications of the proposed changes, it's essential to first understand Boston's current method of levying property taxes and the burdens placed on each class.
A. Property Tax Levy and Proposition 2 ½
The property tax levy is the total amount of property tax, both real and personal, collected by the city annually. The ability to increase this tax levy annually is governed by Proposition 2 ½, introduced in 1980. This regulation disconnects the tax levy growth from changes in assessed property values, allowing for consistent growth in property tax revenue despite valuation fluctuations.
Under Proposition 2 ½, cities can increase the previous year's property tax levy by 2.5% plus any additional tax from new property developments. This new growth can significantly exceed the 2.5% limit due to factors like construction, development, and properties returning to taxable status. New developments add to the tax levy by taking into account the extra demand these developments place on municipal services. The new growth figure is calculated by applying the increase in assessed value from new developments to the previous year's tax rate, then adding this to 102.5% of the last year’s levy.
From 2004 to 2024, Boston's tax levy grew by an average of 5.5% annually, fueled largely by new growth. In this period, the levy increased from just under $1.1 billion to nearly $3.2 billion, with projections for 2025 estimating further growth. Despite significant fluctuations in commercial property values during economic downturns like the Great Recession and the COVID-19 pandemic, tax revenue continued to grow, aligning with the goals of Proposition 2 ½.
B. Shifting Tax Burden from Residential to Commercial
Assessment Allocations
In fiscal 2024, residential properties constituted 67% of Boston's total assessed value, with commercial properties making up the remaining 33%. The residential class includes diverse property types such as single-family homes, apartments, and condominiums. Conversely, the commercial class encompasses office buildings, retail spaces, and industrial properties.
Burden Shift to Commercial Class
Illustrations below demonstrate how, although the commercial class accounts for just 33% of total assessed value, it bears 58% of the property tax due to current laws that allow municipalities to shift a greater tax burden onto commercial properties. This legal framework permits cities to require the commercial class to pay up to 175% of what would be considered their fair share based on assessed values, provided the residential class pays at least 50% of its fair share.
II. Proposed Legislation
The proposed legislation, titled “An Act Relative to Property Tax Classification in the City of Boston,” aims to protect residential taxpayers from potential increases in property taxes due to falling commercial property values by allowing an increase in the maximum shift of tax burden onto commercial properties from 175% to 200%, and reducing the minimum tax burden for the residential class from 50% to 45%. This change, set to start in fiscal 2025 and phase out over five years, addresses the anticipated rise in residential property values and the decline in commercial property values.
III. Summary
Mayor Wu’s petition seeks to use legislative measures to buffer residential taxpayers from the potential surge in tax bills that could result from a decrease in commercial property values, paired with an increase in residential property values. This approach aims to balance the tax levy more favorably towards residential property owners, reflecting broader shifts in property value dynamics within Boston. However, this raises questions about increasing the tax burden on a declining commercial property market, highlighting the challenges of managing urban fiscal policies in changing economic landscapes.
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