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Sinking Office Values Threaten Boston with $1B Tax Deficit

Written by on 02/16/2024

The downturn of some commercial property values could send Boston’s tax shortfall upwards in the next few years.

The city could lose more than $1 billion in tax revenue over the next five years, according to an analysis by Tufts University’s Center for State Policy Analysis and the nonprofit Boston Policy Institute reported by Bloomberg. The analysis leans on a McKinsey & Co. estimate that office values would fall by at least 30 percent through the end of the decade.

The culprit is the heavy reliance of Boston’s tax structure on commercial property taxes. More than a third of tax revenue is linked to the commercial property market, dwarfing that in New York City, Chicago and Miami, which count between 5 and 15 percent.

Property taxes are derived from assessed values, so the problem could build slowly.

The city is on track to hit an annual shortfall on collections of around $500 million beginning in 2029. That would represent roughly 10 percent of total revenues.

Boston is facing the same challenges, including interest rates and hybrid work scenarios, as other major cities. But other metros can utilize local sales and income taxes to boost their budgets, which isn’t feasible in Boston as Massachusetts restricts those measures at the local level.

For Boston to close the deficit stemming from the struggling commercial property market, it would need to raise taxes on residents by as much as 30 percent. The commercial property tax rate is roughly 2.5 percent, compared to about 1.1 percent for residences.

Solutions are hard to come by. Gov. Maura Healey proposed an increase in taxes towns and cities can charge for hotel rooms, meals and locally-registered vehicles.