With the rise in people working from their home and outside of traditional office buildings, there has been a justifiable concern about the impact of empty downtown office space on city revenues. A new report about Boston by The Center for State Policy Analysis at Tufts University and the Boston Policy Institute, shows just how bad things can get. This is a particularly serious problem for cities like Boston, Atlanta and Dallas that rely heavily on commercial property taxes. 

The report begins by laying out the magnitude of the problem: “As a result of the ongoing collapse in office values, Boston is likely to face a cumulative revenue shortfall of more than $1 billion in the next five years. And with no clear prospect for recovery, such shortfalls could persist for decades, triggering a long-term decline in public services and economic vitality.”

Boston is likely to be particularly hard hit because commercial properties are taxed at roughly 2.5 percent compared with around 1.1 percent for residences. As the report states, “This differential tax rate makes it extremely tricky to compensate for declining office values by converting offices to apartments or raising tax on residents. A $20 million apartment building is a lot less valuable—for tax purposes—than a $20 million office, so while efforts to convert commercial buildings into housing may help revitalize downtown spaces, they permanently reduce the city’s tax base.”

A few of the major findings: 

• “More than one-third of Boston tax revenue comes from commercial property taxes, by far the highest proportion among major U.S. cities. This leaves Boston especially vulnerable to falling real estate values.”

• “Such outsize dependence on commercial property is unusual. In Chicago, Miami, New York, and Washington, D.C., commercial property taxes comprise roughly 5 percent to 15 percent of total revenue. That’s less than half what you find in Boston.”

• “This is not a short-term challenge but the arrival of a new normal, where annual tax collections in 2029 and beyond will be roughly $500 million below the current trend.”

Clearly something has to give. Other cities saddled with similar problems can seek out other forms of revenues to make up for commercial property taxes. But here’s where things get particularly tough in Boston, as it is severely constrained by the state from bringing in other sources of revenues. In fact Massachusetts won’t allow Boston or any other city to use local sales or income taxes. The only obvious alternative is to raise residential property taxes, and the report indicates that in order to make up for the decline in commercial real estate, the city would have to bring in a 25% to 30% increase in residential property taxes.

Anyone who has been around the world of city taxes knows that one of the most surefire ways to lose an election is to raise these taxes. As the National League of Cities proclaimed in a 2023 report, “Americans don’t like taxes, and the federal income tax was once the most despised. But that changed 35 years ago. Since then, surveys show that property taxes are loathed above all others.”

According to press reports, leaders in Boston don’t seem to be panicked by this report, As the commissioner of Boston’s assessment department, Nick Ariniello was quoted as saying, “Although we don’t feel that the current real estate environment is going to lead to budgetary concerns, it is something that we are keeping a close eye on,” he said. “A vibrant downtown and a strong mix of commercial and residential property is one of the things that helps make Boston the world class city that it is.”

In the same press report, the study’s author Evan Horowitz rejoindered by calling the city’s confidence, “totally implausible. . . The idea that they don’t see anything in the real estate market that would affect tax revenues is staggering,” he said.

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