Boston Faces Potential Tax Base Loss as Remote Work and High Interest Rates Take Toll

A recent report warns that Boston could suffer a significant loss in its tax base due to the growing popularity of remote work and high interest rates. This combination has created what the report refers to as an “economic act of God” that poses a considerable risk to the city’s financial stability.

The report, published by the Boston Policy Institute and the Center for State Policy Analysis at Tufts University, highlights the potential consequences of a decline in the value of office buildings. This decline could lead to a substantial decrease in commercial property taxes, which form a significant portion of Boston’s revenue for essential services such as education, law enforcement, and parks.

Although quantifying the exact impact of the decline in commercial real estate prices is challenging, the report estimates that Boston could face a cumulative tax shortfall of $1.2 billion to $1.5 billion between 2025 and 2029. This would result in an annual reduction of approximately 10% of total revenues, equating to $400 million to $500 million less each year than the long-term trend suggests.

While the residential property market in Boston continues to thrive, the commercial property market has experienced a lag in demand and prices. Recent sales of office buildings have seen price markdowns, and approximately 20% of offices in the city are currently vacant.

The report identifies two factors contributing to this trend. The first is the popularity of remote or hybrid work schedules, which have persisted since the COVID-19 pandemic began, leading to reduced demand for office space. The second factor is high interest rates, which increase mortgage costs and make owning commercial buildings less profitable.

One of the main concerns highlighted in the report is Boston’s heavy reliance on commercial property taxes for its revenue. Property tax collections currently make up nearly 75% of the city’s total revenue, significantly more than other major metropolitan areas like New York City, Chicago, and Washington, D.C. The report emphasizes that addressing this impending crisis will require significant political action, as creative accounting or financial management alone will not be sufficient to offset the tax falloff.

The report acknowledges that there are limited options for generating new revenue due to state laws. It suggests the possibility of increasing the tax rate on residential properties, although a substantial hike would be necessary to fully compensate for the decline in commercial property tax revenues. Additionally, it proposes exploring alternative solutions such as granting Boston the authority to impose additional taxes or introducing a charge for driving downtown.

Without a substantial response, the report warns that Boston may face the difficult choice of reducing salaries or services, which could have serious implications for public safety, climate resilience, and the city’s ability to attract future residents. While the situation is undoubtedly challenging, proactive measures and innovative approaches will be necessary to safeguard Boston’s financial stability in the face of this economic shift.