BOSTON, LIKE ALL US CITIES, has seen major disruptions from the pandemic, and nearly a year after the COVID public health emergency was declared over, those effects are still being felt. Chief among them is the dramatic shift in work patterns that has seen many employers adopt permanent hybrid schedules, with workers dividing their time between the office and working remotely from home. 

That change is rippling its way through the economy, with the biggest impact being felt in the commercial real estate market, where office vacancy rates have soared as employers pare back their need for space. That, in turn, has generated widespread concern that the new work patterns could send cities into a downward spiral. 

That spiral – termed an “urban doom loop” by researchers at Columbia University – starts with high office vacancy rates. In Boston, the office vacancy rate in the fourth quarter of 2023 stood at 23.1 percent, with the vacancy rate approaching 30 percent for less prime Class B space, according to the Boston office of Colliers, a commercial real estate service firm.

High vacancy rates will eventually translate to lowered assessed values, as buildings generate less income for owners. If those lowered assessments decrease the tax revenue from commercial property, cities could be forced to cut services ranging from police to park maintenance. Cuts to public safety or public amenities, say some researchers, could prompt further retreat from cities by white-collar employers, setting the “doom loop” in motion. 

After deflecting talk of trouble for municipal finances for more than a year, city officials now acknowledge they are concerned about the impact of declining assessments on office buildings. If no action is taken, it could mean shifting the property tax burden to fall more heavily on residential taxpayers. With that in mind, Mayor Michelle Wu announced that she is filing a home-rule petition that, if approved by the City Council, will ask state lawmakers for authority to boost the commercial tax rate higher than what is otherwise permitted by law. The goal, Wu said in announcing the move, is to “protect residents and homeowners against sudden and dramatic tax increases.” 

Here’s an explanation of Boston’s tax predicament and what the mayor is proposing to address it. 

What are Boston’s sources of property tax revenue?

Like all communities, Boston relies on tax payments from both residential and commercial taxpayers, to fund its annual $4.3 billion budget. Boston is particularly reliant on property taxes, which account for 73 percent of all city revenue. Of that revenue, commercial taxpayers account for about 58 percent of the city’s property tax receipts while residential taxpayers account for about 42 percent.

Is all property taxed at the same rate? 

No. Boston, like about a third of all Massachusetts cities and towns, takes advantage of state law allowing communities to set different rates for commercial and residential property. So-called “split rates” are almost always set to shift more of the tax burden onto commercial property owners and cushion the tab of residential taxpayers. Boston has the largest difference in these rates allowed under the law, with the rate for commercial taxpayers set at 175 percent of what their share of the tax levy would be without the split rate. 

What is the problem Boston is now facing with its tax base? 

The dramatic shift in work patterns that led to high office vacancy rates is going to result in decreases in the assessed value of some office buildings, especially those with less desirable Class B office space. Two office buildings that sold eight years ago for $16 million were unloaded last September for $4.1 million, the Globe reported. Last month, the paper also reported, a 21-story downtown building that sold for $121.7 million in 2005 was sold for $78 million. Without any change, the decline in Boston office building values will lead to big decreases in the taxes from these properties. With the commercial tax rate already at the maximum allowed by state law, the result could be a huge hole in the city budget unless Boston dramatically increased the tax rate on residential property to make up the shortfall. 

What’s the potential scale of the problem? 

The nonprofit Boston Policy Institute earlier this year issued a report authored by Evan Horowitz, director of Center for State Policy Analysis at Tufts University, estimating a 20 to 30 percent decline in office building values that would lead to an annual revenue shortfall ranging between $400 million and $500 million. City officials dispute that there will be a shortfall, since they can maintain the overall tax levy by shifting the tax burden or increasing tax rates.

What is the Wu administration trying to do about it?

They have put forward a “just in case” measure that asks the City Council to approve and send to Beacon Hill a home rule petition allowing the administration to temporarily raise commercial tax rates. City officials say it’s too early to say if they’ll need the change, but the Wu administration is hoping the Legislature will sign off on the plan before it adjourns in July, before the city sets its new tax rates at the end of the year. 

Exactly what would the legislation do?

The measure would allow the city to temporarily increase commercial tax levy from 175 percent of the share it would otherwise be to 200 percent. The legislation would let the city initiate the temporary hike in any of the next three fiscal years. After going to 200 percent in the first year, the commercial rate would gradually decrease over the following three years and land back at 175 percent in year five. 

Has this ever been done before? 

Mayor Thomas Menino’s administration proposed the same thing in 2004, and “successfully averted a similar shock to residential taxpayers through this same mechanism,” Wu said in her letter to city councilors when she filed the measure. The Wu administration proposal mirrors the Menino one, and allows other cities and towns to opt in as well.

How is this economic situation different?

Horowitz, the Tufts University analyst, noted that the city in 2004 was coming out of the dot-com crash, rather than a worldwide pandemic that reordered how people work. Ashley Groffenberger, the city’s chief financial officer, acknowledged on NBC10 some differences from 20 years ago, since there has been a divide in the health of the commercial real estate sector. Brand new buildings opening downtown Boston are doing well, but there are older buildings in distress, as seen in the drop in value. 

How would the proposed increase in commercial tax rates affect tax bills for those owners?

Nick Ariniello, the city’s assessing commissioner, said the change would not “create a shock” to what commercial property owners “are already forecasted to pay for their property taxes.” For commercial property owners whose assessments decrease, he said it would only mean “the level of decrease they’ll see [in their tax bill] is slightly less than what it would otherwise be.” For his part, Horowitz views it as a temporary fix to a semi-permanent economic problem.

What are the other options?

If commercial values see a steep decline, the city could raise residential taxes dramatically, leading to higher tax bills for homeowners and rent increases if landlords pass on the costs. The other option would be cuts to city spending, a move that is likely to draw pushback from whatever constituencies are affected by the cuts. Horowitz said the more durable solution, rather than a temporary classification shift, is a local sales surtax, which would come on top of the already existing state sales tax.

What are the politics of the situation?

Residents, many of whom vote, won’t be happy if they see their tax bills spike as the city heads into an election year in 2025. Meanwhile, segments of the city’s business community, including developers, already have some gripes with Wu – including her proposal for a return to rent control – and this legislation is unlikely to help that relationship. 

Greg Vasil, CEO of the Greater Boston Real Estate Board, who already clashed with Wu over rent control, said commercial buildings are in an “unsettling downward transition” period. “We are deeply concerned that increasing commercial tax rates to recoup lost revenue will only take us closer to the urban doom loop being seen in many other American cities,” he said in a statement. “Businesses have carried a tremendous fiscal burden for the city, and pushing them harder at a time when their buildings have lost value is fiscally irresponsible. This is a time unlike any other in the last 30 years, and piling more financial burdens on a struggling industry is no solution at all.”