Boston's shifting tax burden in fiscal 2004 : the potential impact to homeowners and business

2004·0.68 MB·English

by  Boston Municipal Research Bureau

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SPECIAL
REFOR
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BOSTON MUNICIPAL RESEARCH BUREAU
333 Washington Street~Suite854, Boston, MA 02108
VOICE [phone] -FAX [phone]-www.bmrb.org
January 8, 2004 _J No. 04'1
rek-
BOSTON’S Shifting Tax Burden In Fiscal 2004
ThePotential Impact to Homeowners and Businesses
Formany communitiesin the Commonwealth, including Boston, the sharp increase inresidentialpropertyvalue combined
with a decrease in business value will cause a major shift in the tax burden from the business to the residential class in
fiscal 2004. In Boston, this could result in an increased tax bdl for the average homeowmerof $816 or 41.4% from fiscal 2003,
while the taxpersquare footfordowntowncommercialoffice space coulddecreaseby $1.35 or 17.1%. Inresponse, the Cityof
Boston proposed legislation to change existing tax law regarding the classification of property in an attempt to soften the
residential increase yet still maintain some - albeit less ' rehef for commercial office property that represents 48.9% of all
business property value in fiscal 2004. However, with this legislative change, other commercial, industrial and personal
propertieswhosevaluesremainlevelor increasewouldexperience ataxincrease. Basedon Boston'sproposal, the Legislature
passed and the Governor signed interim legislation (Chapter 138 ofthe Acts of2003) that stopped short ofenacting Boston’s
proposedchangestoallowfurtherstudyofthisissuebeforetakingaction.
The newlawestablished a 5'membercommission to recommend new legislation to amend the classificationlaw, but onlyfor
fiscal years 2004-2008. The commission held a pubhc hearing on December 30th, and wdl present recommendations to the
LegislaturebyJanuary 12, 2004. Akeyissuefortheproposedtemporary increaseinthebusinesscedingisthecertaintythat it
wdlberestoredto 175%bynolaterthanfiscal2008.
Classification Impact In Fiscal 2004
The shift in tax burden is due to a divergence ofbusiness and residential property values with the business share ofthe levy
having reached the ma.ximum ceiling of 175% last year. Residential property value for fiscal 2004 increased by 26.5%, while
business value decreased by 2.2%.
CityofBoston
Commercial office value decreased by
Impactto Boston ofChanging Classification Law in Fiscal 2004
8.3% even with new growth included.
Under the mechanisms ofclassification,
175% 200% Difference
this situation will create a potential Residential/BusinessSectors FY02 FY03 FY04 FY04 FY04
shift of about $113 million from the AverageSingle FamilyTaxBill $1,740 $1,972 $2,788 $2,244
business to residential class. With no Change - $232 $816 $272 ($544)
change in legislation, the tax bdl for the %Change - 13.3% 41.4% 13.8% -19.5%
average single-family homeowner
OfficeTowerTax/Sq. Ft. $8.08 $7.89 $6.54 $7.47
would increase by $816 or 41.4% while
Change - ($0.19) ($1.35) ($0.42) $0.93
the tax bill for the average three-family %Change - -2.4% -17.1% -5.3% 14.2%
homeownerwould increaseby $1,292 or
56.6%.
Boston initially proposed relief vaa its legislative package submitted to the General Court in December of 2002. The City
propo.sed that the current classification limits be changed to reduce the residential class’s minimum floor from 50% to 45%,
^
and to increase the business class’s maximum ceilingfrom 175% to 200%. The residential tax increasewould be significantly
reducedandsomerehefforthecommercialofficecomponentwouldberetainedbutnotforotherbusinessproperties.
The COMMISSION’S Charge
The special commission must report back to the Legislature byJanuary 12, 2004 withproposedlegislation to temporarily
amend the current property tax classificationlaw. To assist in its efforts, the interim legislation prowdes the commission
withthefollowingguidehnes:
The currentbusiness ceihngof175% offullvalue share maybe temporarilyincreased byehgible municipalities, not to
exceed200%.
No participating municipality may increase its
current business threshold by more than 25
CLASSIFICATION: STATE LAWTHAT
percentagepoints.
AllowsTaxBurden ShiftToBusiness
Thebusinessceihngmustbereducedbackto175%by
nolaterthanfiscal2008.
The business ceihng may be reduced back to 175% Faced with a state requirement to revalue all taxable
earher than fiscal 2008 if growth in business value property at full and fair cash value, which would have
reduces the residential share of the levy to its fiscal causeda significant shift ofthepropertytaxburdenfrom
2003level. business to residential property, the pohtical leaders of
Boston and other cities succeeded in 1978 in securing
Chapter 138 also authorizes cities and towns using a enactment of a constitutional amendment for the
quarterly tax payment system to issue third quarter classificationofproperty. Thischangewasintendedto,in
prehminar}' tax bills, and to consider other mechanisms effect, maintain the tax share status quo as it existed at
suchasasmallbusinessexemption. thattime,whenthebusiness classpaidthe majorportion
ofthetotallevy. Inaddition,amunicipahtycouldexempt
Maximizing HomeownerBenefit up to 10% ofthe average assessedvaluation ofresidential
The City of Boston has maximized tax benefit to the real property when used as the taxpayers’ principal
homeowner through full classification and appUcation of residence. The residential exemption does not affect the
the highest residential exemption allowed by law. These normalresidentialshare ofthelevy,but shifts the burden
strategies were designed to retain and attract a strong by the amount of the total exemption from principal
middle class, ease the tax burden on lower income residencestonon domicileresidentialproperties.
residents, and strengthen the intricate link between
housing affordabihty, business activity and neighborhood The original classification legislation stipulated that
vitahty. residentialtaxescouldbenolowerthan65%ofwhatthey
wouldbe iftherewere a singletax rate (fuUvalue share),
Full classification results when a municipahty chooses to andbusiness propertytaxes couldnot exceed 150% ofits
assess the residential class at the minimum percentage of full value share. The classification law was amended in
full value allowed by law, thereby maximizing the tax 1988 to reduce the residential floor to 50% of fuU value
burden on the business class. As such, Boston share, while the business class ceihng was increased to
traditionally assesses the residential class at shghtly more 175% of fuU value share. One condition of the 1988
than 50% of its full value, and in turn assesses the amendment stipulated that in no case could the
business class at the percentage offull value necessary to residential share ofthe levy be reduced below its lowest
reachthelimitofclassificationlaw. level sincefiscal 1984,which forBostonwas 30.1%. Also,
at that time, the residential exemption was increased to
Until fiscal 2003, the assessment percentage for business 20%. Theresidentialexemptionwasincreasedto30%for
property required to reach fuU classification was below Bostoninfiscal2001.
the 175%legalmaximum. FullclassificationinBostonhas
led to the business class traditionally paying 70% of the Asoffiscal2003,102or29.1%oftheCommonwealth’s 351
levy on about 40% oftotal value, and the residential class cities and have adopted a spht tax rate. Of those 102
paying 30% (thelowest amount allowedbylaw) on about communities,11alsoapplyaresidentialexemption.
60% of total value. In doUar terms, the impact of
classificationinfiscal2003re,sultedinBoston’sbusinessclasssubsidizingtheresidentialclassbypaying$302mihionmore
inpropertytaxesthanitwouldhaveiffullclassificationwerenotinplace.
In addition, the City has traditionally apphedthe maximum residential exemption rate allowable,whichis currently 30%
of assessed value, based on average residential value. In fiscal 2004, the residential exemption w'ould increase to
approximately $1,375 with no legislative change, and to $1,107 if the business ceding were increased to 200%. In fiscal
2003, full classification andthe residential exemption of$988 resultedin an average singledamilytaxbill of$1,972,which
compared favorably with similar tax bills in other surrounding cities and towns. The dual tax benefits to Boston
homeownersarefurtherhighhghtedinthefoUowdnggraphs.
CityofBoston CityofBoston
ImpactofClassification Impactofthe Residential Exemption
Fiscal 2003 Fiscal 2003
Average Bill Average Bill
$6,000 $6,000
$5,000 $5,000
$4,000 $4,000
$3,000 $3,000
$2,000 $2,000
$1,000 $1,000
$0 $0
1 Family 2 Family 3 Family 1 Family 2 Family 3 Family
Classified Bw/oClassification w/o Exemption DWith Exemption
I |
Classification and the Residential Exemption Save Homeowners:
An averageof$2,745onasingle-familyhome ($1,757onclassificationand$988ontheexemption)
Anaverageof$2,964onatwo'familyhome ($1,976onclassificationand$988ontheexemption)
Anaverageof$2,938on athree-familyhome ($1,950onclassificationand $988ontheexemption)
Reasons For ResidentialTaxJump
TheCityofBoston hadbeenable tomaintainits traditional70%'30%business'residentialsplit intaxle\7burdenthrough
fiscal 2002 in large part because business and residentialproperty values tracked similarly through good economic times
and bad. This trend showed a blip in fiscal 2001, when residential values increased at a much higher rate than business
values. In fiscal 2003, the business and residential values actually tracked in opposite directions, and diverge by even
greatermarginsin fiscal 2004,asshownbelow.
%Growth ofBoston's Business and Residential Property
Fiscal Years 1998-2004
40.0%
31.4%
The divergence in value between the residential and business class, compounded wnth the City of Boston reaching the
business ceiling of 175% last year, had the effect ofshifting $19 million in tax burden from the business to the residential
class in fiscal 2003. In fiscal 2004, this same value/legal limit dynamic will shift about $113 million in tax burden to the
residentialclassunderthecurrentclassificationlaw(175%)or$23millionifthebusinessceilingisraised to200%.
Impact To The Business Class In Fiscal 2004
Conversely, with agreaterdivergenceofvalues in fiscal 2004 and thelec'y at the 175% maximum,business propertywould
reduce its aggregate tax burden by $113 milhon with tax cuts primarily in the commercial class, and in the industrial and
personal property classes due to value changes
and a reduction in the business tax rate by City ofBoston BusinessValue Change
$2.66 or 8.5%. If the business ceiling were Fiscal 2003-2004
raised to 200% in fiscal 2004, the business tax Figures in OOO's
burdenwould reduceby $23.0 rrhllion. The $23
%
million shift to the residential class reflects a Business FY03 FY04 Change
large cut in the commercial office tax burden Commercial $18,640,038 $17,807,530 ($832,508) -4.5%
thatwouldbeoffsetpartiallybyincreasesinthe Commercial Office 11,670,665 10,697,339 (973,327) -8.3%
other commercial, industrial and personal OtherCommercial 6,969,373 7,110,191 140,818 2.0%
property classes. At 200%, commercial office Industrial 602,730 648,818 46,088 7.6%
property in Boston, which represents 48.9% of Personal Property 3,142,579 3,432,029 289,449 9.2%
aU business value in fiscal 2004, generally
would experience a 5% decrease in its tax bill Total Business $22,385,347 $21,888,377 ($496,970) -2.2%
reflectingitsdechne invalue. However, a similarreductionwould not apply to otherbusiness classes. Othercommercial,
industrialandpersonalpropertieswhosevaluesremainlevelorincreasewouldreceiveataxincreasesincethebusinesstax
rate would increase by $1.46 or 4.6% to accommodate the commercial
office value decline. At both 175% and 200%, the business share ofthe NotJust A Boston Issue
tax levy would be less than it was in fiscal 2003. The business class
The dynamic of diverging property value and
accounted for $704.9 million or 68.1% of the levy in fiscal 2003.
Business property would pay $631.1 million or 57.7% of the levy if the reaching the limits of classification is not just a
law were not changed in fiscal 2004, and would pay $721.3 million or Boston issue, as evidenced by the foUovvingfiscal
2003data:
66.0%ofthelevyifthebusinesscedingwereraisedto 200%.
Business property value statewide increased
by 5.3%, w'hde residential value increased
The tax reduction for Boston’s commercial office buddings even if the 13.8%, creating a $73.0M shift in tax levy
business ceding is increased to 200% reflects their decreases in value burdentotheresidentialclass.
due to declining revenues. During the 1999-2003(Q2) period, average
20 of the 102 cities and towms that employ
askingrents droppedby about 19% for selected downtown commercial classification reachedthemaximumbusiness
properties while building expenses increased by over 28%. Final cedingof175%
negotiated rents often include tenant concessions involving rent and Another 30 of the 102 communities that
improvements that would further affect revenue. At the end of the employ classification had a business ceding
third quarter of 2003, the vacancy rate for Boston commercial office over 155%, and are expected to reach the
buddingswas 13.8%. 175%maximuminfiscal2004.
Conclusion
A key issue for the proposed increase in the business ceiling is whether future Legislatures vvid honor a plan approved in
2004 torestorethebusinesscedingto 175%byfiscal 2008. Ofconcernisthata“temporary”increaseinthebusinessceiflng
vvdl become permanent. Mayor Menino and other municipal officials have endorsed a temporary increase, expressing
confidence thatthemarketwadrestorethecurrent“anomaly”backtohistoriclevels. Whattemporarychangesareenacted
shouldbe considered the final and permanent legislative resolution ofthis situation that eitherwdd mitigate the problem
while the market correctsitselfin the next fewyears orvvdlprovide alongertime forthe residentialowmers to adjust to a
newtaxrealityevenwithsigndicantbusinesssubsidization.
How'soonthemarketwillcorrect itselfisnotclear. Residentialandbusinessvaluesareexpectedtocontinueondivergent
paths in the short term. Whde housingprices have softened recently, they do not show signs ofsignificant decline in the
near term, as demand remains high whde supply is lowc On the other hand, business property supply in Boston shows
high vacancy rates combined with increasing supply of about two mdlion square feet of new office space in 2003.
Signdicantjobcreation,whichiscurrentlysluggish, wallbe requiredtooffset thattrend. Commercialvaluescould decline
further in fiscal 2005 causing a second year of larger than average residential tax bdl increases. It vvdl take time for the
effectsofvaluedivergence tobemitigatedbypropertyvaluestrackinginthesamedirection,asishistoricaUythecase.
GOV DOCS
3iMR/S3/
04.1 PECIAL
REPOR T
MUNICIPAL RESEARCH BUREAU
333 Washington Street~Suite854, Boston, MA 02108
\OICE [phone] -FAX [phone]-www.btnrb.org
January 8, 2004 No. 04'1
BOSTON’S Shifting Tax Burden In Fiscal 2004
ThePotential Impact to Homeowners and Businesses
Formanycommunitiesinthe Commonwealth, includingBoston, the sharp increaseinresidentialpropertyvalue combined
with a decrease in business value will cause a major shift in the tax burden from the business to the residential class in
fiscal 2004. In Boston, this could result in an increased tax bill for the average homeownerof $816 or 41.4% fromfiscal 2003,
while the taxpersquare foot fordowntowncommercialoffice spacecould decreaseby $1.35 or 17.1%. In response, the Cityof
Boston proposed legislation to change existing tax law regarding the classification of property in an attempt to soften the
residential increase yet stLU maintain some - albeit less - rehef for commercial office property that represents 48.9% of aU
business property value in fiscal 2004. However, with this legislative change, other commercial, industrial and personal
propertieswhosevalues remain level orincreasewouldexperience a taxincrease. Based on Boston’sproposal, the Legislature
passed and the Governor signed interim legislation (Chapter 138 ofthe Acts of 2003) that stopped short ofenacting Boston’s
proposedchangestoallowfurtherstudyofthisissuebeforetakingaction.
The newlawestablished a S-membercommission to recommendnewlegislation to amend the classification law, but onlyfor
fiscal years 2004 2008. The commission held a pubhc hearing on December 30th, and will present recommendations to the
Legislature byJanuary 12,2004. Akeyissuefortheproposed temporaryincrease inthebusinesscellingis thecertaintythatit
will berestoredto175%bynolaterthanfiscal2008.
Classification Impact In Fiscal 2004
The shift in tax burden is due to a divergence of business and residential property values with the business share ofthe levy
having reached the maximum ceiling of 175% last year. Residential property value for fiscal 2004 increased by 26.5%, while
business value decreased by 2.2%.
CityofBoston
Commercial office value decreased by
8.3% even with new growth included. Impactto Boston ofChanging Classification Law in Fiscal 2004
Linder the mechanisms ofclassification,
175% 200% Difference
this situation will create a potential Residential/BusinessSectors FY02 FY03 FY04 FY04 FY04
shift of about $113 mUlion from the AverageSingle FamilyTaxBill $1,740 $1,972 $2,788 $2,244
business to residential class. With no Change - $232 $816 $272 ($544)
change in legislation, the tax bill forthe %Change - 13.3% 41.4% 13.8% -19.5%
average single-family homeowner
OfficeTowerTax/Sq. Ft. $8.08 $7.89 $6.54 $7.47
would increase by $816 or 41.4% while
Change - ($0.19) ($1.35) ($0.42) $0.93
the tax bUl for the average three-family %Change - -2.4% -17.1% -5.3% 14.2%
homeownerwould increaseby $1,292 or
56.6%.
Boston initially proposed relief via its legislative package submitted to the General Court in December of 2002. The City
propo,sed that the current classification limits be changed to reduce the residential class’s minimum floor from 50% to 45%,
and to increase the business class’s maximum ceiling from 175% to 200%. The residential taxincrease wouldbe significantly
reducedandsomereliefforthecommercialofficecomponentwouldberetainedbutnotforotherbusinessproperties.
Boston Pirblic Library
TheCOMMISSION’S Charge
The special commission must report back to the Legislature byJanuary 12, 2004 with proposed legislation to temporarily
amend the current property taxclassificationlaw. To assist in its efforts, the interim legislation provides the commission
withthefollowingguidehnes:
The currentbusiness ceilingof175% offullvalue share maybe temporarilyincreasedbyehgible municipalities, not to
exceed200%.
No participating municipithty may increase its
current business threshold by more than 25
CLASSIEICATION: STATE LAWTHAT
percentagepoints.
ThebusinesscetLingmustbereducedbackto175%by AllowsTax Burden ShietToBusiness
nolaterthanfiscal2008.
The business ceding may be reduced back to 175% Faced with a state requirement to revalue aU taxable
earlier than fiscal 2008 if growth in business value property at fuU and fair cash value, w'hich would have
reduces the residential share of the levy to its fiscal causeda significant shift ofthepropertytaxburdenfrom
2003level. business to residential property, the political leaders of
Boston and other cities succeeded in 1978 in securing
Chapter 138 also authorizes cities and towms using a enactment of a constitutional amendment for the
quarterly tax payment system to issue third quarter classificationofproperty. Thischangewasintendedto,in
preliminary tax bills, and to consider other mechanisms effect, maintain the tax share status quo as it existed at
suchasasmallbusinessexemption. that time,wUen thebusiness classpaidthemajorportion
ofthetotallevy. Inaddition,amunicipahtycouldexempt
Maximizing Homeowner Beneeit up to 10% ofthe average assessedvaluation ofresidential
The City of Boston has maximized tax benefit to the real property w’hen used as the taxpayers’ principal
homeowmer through full classification and apphcation of residence. The residential exemption does not affect the
the highest residential exemption allowed by law. These normalresidentialshare ofthelevy,but shifts the burden
strategies were designed to retain and attract a strong by the amount of the total exemption from principal
middle class, ease the tax burden on lower income residencestonon domicUeresidentialproperties.
residents, and strengthen the intricate hnk betw'een
housing affordabihty, business activity and neighborhood The original classification legislation stipulated that
vitality. residentialtaxescouldbenolowerthan65%ofwhatthey
wouldbe iftherew'ere a single taxrate (fullvalue share),
EuU classification results w'hen a municipality chooses to andbusinesspropertytaxes could not exceed 150% ofits
assess the residential class at the minimum percentage ot full value share. The classification law' w'as amended in
full value allowed by law^ thereby maximizing the tax 1988 to reduce the residential floor to 50% of full value
burden on the business class. As such, Boston share, while the business class ceiling w'as increased to
traditionally assesses the residential class at shghtly more 175% of fuU value share. One condition of the 1988
than 50% of its full value, and in turn assesses the amendment stipulated that in no case could the
business class at the percentage of full value necessary to residential share of the levy be reduced below' its lowest
reachthehmitofclassificationlaw. levelsince fiscal 1984, whichfor Boston was 30.1%. Also,
at that time, the residential exemption was increased to
Until fiscal 2003, the assessment percentage for business 20%. Theresidentialexemptionwasincreasedto 30%for
property required to reach full classification was below Bostoninfiscal2001.
the 175% legalmaximum. EuUclassificationin Bostonhas
led to the business class traditionaUy paying 70% of the Asoffiscal2003, 102or29.1%oftheCommonw'ealth’s351
levy on about 40% oftotal value, and the residential class cities and hav’e adopted a spht tax rate. Of those 102
paying30% (the low^est amount aUow'edbylaw') on about communities,11alsoapplyaresidentialexemption.
60% of total value. In doUar terms, the impact of
classificationinfiscal2003resultedinBoston’sbusinessclasssubsidizingtheresidentialclassbypaying$302mUlionmore
inpropertytaxesthanitwouldhaveiffuUclassificationwerenotinplace.
In addition, the Cityhas traditionaUy applied the maximum residential exemption rate aUovv'able,which is currently 30%
of assessed value, based on average residential value. In fiscal 2004, the residential exemption would increase to
approximately $1,375 with no legislative change, and to $1,107 if the business ceiling were increased to 200%. In fiscal
2003,full classification and the residentialexemptionof$988 resulted in an average single'famUy taxbill of$1,972,which
compared favorably with similar tax bills in other surrounding cities and towns. The dual tax benefits to Boston
homeownersarefurtherhighlightedinthefollowinggraphs.
CityofBoston CityofBoston
ImpactofClassification Impactofthe Residential Exemption
Fiscal 2003 Fiscal 2003
AverageBill Average Bill
$6,000 $6,000
$5,000 $5,000
$4,000 $4,000
$3,000 $3,000
$2,000 $2,000
$1,000 $1,000
$0 $0
1 Family 2 Family 3 Family 1 Family 2 Family 3 Family
Classified Bw/oClassification Bw/o Exemption DWith Exemption
Classification and the ResidentialExemption Save Homeowners:
An averageof$2,745onasingle-familyhome($1,757onclassificationand $988ontheexemption)
Anaverageof$2,964onatwo familyhome ($1,976onclassificationand$988ontheexemption)
Anaverageof$2,938onathree-familyhome ($1,950onclassificationand$988ontheexemption)
Reasons For ResidentialTaxJump
TheCityofBoston hadbeenabletomaintain itstraditional70%-30%business-residentialsplitin taxlevyburdenthrough
fiscal 2002 in large part because business and residential property values tracked similarly through good economic times
and bad. This trend showed a blip in fiscal 2001, when residential values increased at a much higher rate than business
values. In fiscal 2003, the business and residential values actually tracked in opposite directions, and diverge by even
greatermarginsin fiscal2004,asshownbelow.
%Growth ofBoston's Business and Residential Property
Fiscal Years 1998-2004
40.0%
314%
30.0%
265%
.
200%
. 12.6%
100%
.
0.0% -2.2%
-100%
.
FY98 FY04
The divergence in value between the residential and business class, compounded with the City of Boston reaching the
business ceilingof 175% last year, had the effect ofshifting $19 million in tax burden from the business to the residential
elass in fiscal 2003. In fiscal 2004, this same value/legal Emit dynamic will shift about $113 million in tax burden to the
residentialclassunderthecurrentclassificationlaw (175%)or$23millionifthebusinessceiUngisraisedto200%.
BOSTONPUBLICLIBRARY
3 9999 06392 797 2
ImpactToThe Business Class in Fiscal2004
Conversely,with agreaterdivergence ofvalues in fiscal 2004 and the lex^at the 175%maximum, business propertywould
reduce its aggregate tax burden by $113 million with tax cuts primarily in the commercial class, and in the industrial and
personal property classes due to value changes
and a reduction in the business tax rate by cityofBoston BusinessValue Change
$2.66 or 8.5%. If the business ceiling w^ere Fiscal 2003-2004
raised to 200% in fiscal 2004, the business tax Figures in OOO's
burdenwouldreduce by $23.0miUion. The $23
million shift to the residential class reflects a Business FY03 FY04 Change %
large cut in the commercial office tax burden Commercial $18,640,038 $17,807,530 ($832,508) -4.5%
thatw'ouldbeoffsetpartiallybyincreasesinthe Commercial Office 11,670,665 10,697,339 (973,327) -8.3%
other commercial, industrial and personal OtherCommercial 6,969,373 7,110,191 140,818 2.0%
property classes. At 200%, commercial office Industrial 602,730 648,818 46,088 7.6%
property in Boston, which represents 48.9% of Personal Property 3,142,579 3,432,029 289,449 9.2%
aU business value in fiscal 2004, generally
w^ould experience a 5% decrease in its tax bill Total Business $22,385,347 $21,888,377 ($496,970) -2.2%
reflectingits dechne in value. How^ever, a similarreduction wouldnot applytootherbusinessclasses. Othercommercial,
industrialandpersonalpropertiesw’hosevaluesremainlevelorincreasewouldreceiveataxincreasesincethebusinesstax
rate would increase by $1.46 or 4.6% to accommodate the commercial
office value decline. At both 175% and 200%, the business share ofthe NotJust A Boston Issue
tax le\y would be less than it was in fiscal 2003. The business class
The dynamic of diverging property value and
accounted for $704.9 million or 68.1% of the levy in fiscal 2003.
Business property w'ould pay $631.1 million or 57.7% of the levy if the reaching the limits of classification is not just a
law were not changed in fiscal 2004, and w^ould pay $721.3 million or Boston issue, as evidenced by the following fiscal
2003data:
66.0%ofthelevyifthebusinesscellingwereraisedto 200%.
Business property value statewide increased
The tax reduction for Boston’s commercial office buddings even if the by 5.3%, while residential value increased
13.8%, creating a $73.0M shift in tax levy
business ceiling is increased to 200% reflects their decreases in value burdentotheresidentialclass.
due to declining revenues. During the 1999 2003(Q2) period, average
20 of the 102 cities and towms that employ
asking rents dropped byabout 19% for selected downtown commercial classificationreachedthemaximumbusiness
properties whde building expenses increased by over 28%. Final cedingof175%
negotiated rents often include tenant concessions involving rent and Another 30 of the 102 communities that
improvements that would further affect revenue. At the end of the employ classification had a business ceding
third quarter of 2003, the vacancy rate for Boston commercial office ov'er 155%, and are expected to reach the
175%maximuminfiscal2004.
buddingsw^as13.8%.
Conclusion
A key issue for the proposed increase in the business ceding is whether future Legislatures w'dl honor a plan approved in
2004 torestorethebusinesscedingto 175%byfiscal 2008. Ofconcernisthata“temporary”increasein thebusinessceding
vvdl become permanent. Mayor Menino and other municipal officials have endorsed a temporary increase, expressing
confidencethat themarketwTUrestorethecurrent“anomaly”backtohistoriclevels. Whattemporarychangesareenacted
should be considered the final and permanent legislative resolution ofthis situation that either w^dl mitigate the problem
while the market corrects itselfin the next few^years orwill provide alongertime forthe residentialowners to adjust to a
newtaxrealityevenwithsignificantbusinesssubsidization.
How'soon themarketw'dlcorrectitselfisnotclear. Residentialandbusinessvalues areexpectedtocontinueondivergent
paths in the short term. Whde housingprices have softened recently, they do not show' signs ofsignificant decline in the
near term, as demand remains high w'hile supply is lowc On the other hand, business property supply in Boston shows
high vacancy rates combined with increasing supply of about two mdlion square feet of new' office space in 2003.
Significantjobcreation,which iscurrentlysluggish,willbe requiredtooffset that trend. Commercialvaluescoulddecline
further in fiscal 2005 causing a second year oflarger than average residential tax bid increases. It vv'dl take time for the
effectsofvaluedivergencetobemitigatedbypropertyvaluestrackinginthesamedirection,asishistoricaUythecase.