BOSTON MAYOR Michelle Wu’s push to raise commercial property taxes is poised for the ol’ “Bay State compromise,” the script of which goes something like this:
Government: “I am raising taxes because I want to spend more.”
Business: “How about lowering your proposed increase in spending?”
Government: “Nah, don’t think so. But because I am a keen listener, I will raise your taxes by something less than my original proposal.”
Cue the redirection of capital and talent to more welcoming environments. Rinse, lather, repeat.
With the Boston business landscape facing headwinds—double-digit office vacancy rates, stagnant new development, and out-migration of talent—a genuine compromise would reduce the city’s costly new building mandates and new spending rather than simply passing the burden to businesses. But that’s not the compromise we’re being offered.
Mayor Wu’s proposal to shift an even greater share of the property tax burden onto commercial property owners aims to plug a projected $1.4 billion budget gap. Her initial plan would have increased the commercial tax rate to 200 percent of the residential rate, with a gradual phase-down, over four years, back to 175 percent. The proposal received a lukewarm reception on Beacon Hill, which, together with the city council, must approve any lift of the statutory cap currently set at 175 percent.
Wu’s stated goal is to shield Boston’s residents from higher tax bills, and certainly, as mayor, she’s concerned about the inflationary pressures her constituents face.
By focusing solely on taxing businesses, Wu is missing Boston’s broader economic challenges. Pre-pandemic, the city could count on new development to generate tens of millions in annual revenue. With current market conditions, those days are a distant memory.
Boston’s double-digit office vacancy rates—driven in part by remote work—are among the highest in the nation and unlikely to decrease in the near future, curbing demand for office space and straining city revenues as companies opt for less space when leases expire. Rising construction materials costs and interest rates further cloud the outlook.
Compounding these market challenges are city policies that further discourage new development, such as Boston’s maze-like approval processes, new building mandates, saber-rattling on rent control, new sales taxes, and arcane business licensing requirements.
Now add to that bonfire the jet fuel of raising taxes on office property and businesses. The obvious private sector responses will further worsen the city’s finances. Tenants will opt for less space when their current leases expire. And, as is obvious from a number of downtown office properties selling at half or less than half of their original purchase prices, the city will face continued abatements, further reducing city commercial real estate revenues.
As Pioneer Institute recently pointed out, commercial property owners already shoulder a disproportionate share of Boston’s tax burden. Some may assume they’ll simply absorb this added cost—but the reality is more complex. Many of these owners are increasingly looking to other cities, a shift that reflects Massachusetts’ broader problem of losing talent and capital to more business-friendly environments.
Currently, over 30 percent of Boston’s tax revenues come from commercial property taxes, the highest share among major US cities. Boston’s FY24 commercial tax rate is $25.27 per $1,000 of market value, while residential properties are taxed at just $10.90. According to the state Department of Revenue, Boston’s average FY23 single-family tax bill was 16.4 percent lower than the state average of $6,822.
Even if Mayor Wu’s proposal passes the Legislature, the city must still confront its underlying issues: declining competitiveness, rapid budget growth, and a limited set of revenue sources. The city cannot continue increasing its budget by 8 percent annually—even with a growing business base, something we are not experiencing right now. Belt-tightening on nonessential services must be part of the conversation.
With a disciplined approach to spending, the mayor could gain support for measures to diversify revenue streams beyond property taxes. Instead, we’re left with a ‘Bay State compromise’ that allows Boston to hike commercial tax rates by 6.5 percentage points above current levels, or 181.5 percent of residential rates.
This is not a long-term solution—more like a costly Band-Aid that assumes these increases will have no effect on business decisions or investment in the city.
That is not a compromise.
Jim Stergios is the executive director of Pioneer Institute.
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