Before moving forward with a plan to hike tax rates on commercial property owners to prevent steep hikes for homeowners, Boston Mayor Michelle Wu should consider other options — including cutting spending, a fiscal watchdog is warning in a new report.
Wu and the Boston City Council “must exercise restraint” geared toward “taming the budget,” with a particular eye on controlling education spending by closing and consolidating schools, according to a new report released Thursday by the Boston Municipal Research Bureau. The watchdog group also suggests the city diversify its revenue sources and consider tapping into its reserves, known as the budgetary fund balance.
“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 research bureau, an independent think tank whose board includes an array of city business leaders, including a number of prominent real estate developers. “Prioritizing prudent financial management, exploring alternative revenue sources, and implementing targeted cost-saving measures are essential steps in these uncertain times and will ensure Boston’s long-term financial health.”
Thursday’s report is just the latest in a string of such warnings from business groups and financial watchdogs since March, when Wu sought sign-off to increase tax rates for commercial real estate in what she called an effort to prevent a “sudden, dramatic, and concentrated shock to residential property owners.” Wu’s proposal — which needs approval from both the City Council and the state Legislature — comes amid a slump in its office market that could threaten city coffers, since Boston relies heavily on property taxes to fund city operations. As commercial real estate values are projected to keep falling, the city could be forced to make painful cuts or increase rates for homeowners.
Wu is instead looking to raise tax rates on commercial real estate, an effort to keep city revenue steady while protecting residential taxpayers from enormous increases. But the research bureau cautioned this week that Wu’s plan could make “businesses and the city less competitive.” And some city councilors have already sounded skeptical about her proposal.
Boston is more reliant on revenue from property taxes than many American cities. Here, property taxes fund about three-quarters of the city’s annual budget. Since Massachusetts cities must balance their budgets, if commercial property values declined — as experts forecast — the city could be forced to hike rates on homeowners to make up the difference in revenue.
Boston uses a split tax rate, with property tax rates on commercial real estate about two-and-a-half times as high as they are on residential, and new commercial development has surged in recent years, powering the city’s budget. Today about two-thirds of Boston’s property tax revenue comes from commercial real estate.
State law limits how much higher commercial rates can climb, and how much lower residential rates can dip. Wu is seeking to expand those limits, which requires approval from the state Legislature. If the measure is approved, the city will be able to enact the shift at any time over the next three years.
Earlier this year, a report by the newly-formed Boston Policy Institute and the Center for State Policy Analysis at Tufts University estimated that city tax revenue could fall $1.2 billion to $1.5 billion below prior projections over the next five years thanks to the declining value of Boston’s office buildings. An uncertain economic climate has already prompted Governor Maura Healey last month to halt freeze state hiring, and the Boston Public Schools district faces a budget that would slash hundreds of positions.
Meanwhile, Wu’s $4.6 billion budget proposal for the next fiscal year would boost city spending by 8 percent, or $344 million. As she proposed the spending plan last month, the mayor assured the public that “the city is in a very strong position.”
It’s not the first time the research bureau has expressed caution about Wu’s tax classification plan. At a City Council hearing last month, Interim President Marty Walz broached spending cuts, telling councilors, “increasing taxes at the same time as there are notable increases in spending is sending a message about a lack of fiscal restraint.”
At the same hearing, Boston’s Chief Financial Officer, Ashley Groffenberger, said the city considered and ultimately dismissed that option.
“The downside or sort of the outsize harm that we would put onto the city of cutting upwards of hundreds of millions of dollars sort of outweighs any good you would get on the tax rate side,” Groffenberger said.
Niki Griswold and Catherine Carlock of the Globe staff contributed to this report.
Emma Platoff can be reached at emma.platoff@globe.com. Follow her @emmaplatoff.