With only two months left before Boston’s next tax bills go out in the mail, Mayor Wu and the city councillors are scrambling for ways to ease a possible crunch for homeowners and businesses triggered by a national downturn in market values for commercial properties.

According to preliminary estimates by the Wu Administration for updated tax assessments, overall residential property values are up by 4 percent, while commercial values are down by 7 percent. Though both classes of property can be taxed at different rates, the change in values would place—by comparison with the previous year—a smaller share of the tax levy on commercial property and a larger share on residential property.

Wu is still trying to get approval from the Legislature on a home rule petition that would temporarily reduce the spike in bills for residential owners, a measure that has already been approved by the City Council. The version later approved by the House of Representatives would raise the tax ceiling on the commercial property class from 175 percent of assessed value to 190 percent, but the measure has yet to gain approval in the Senate.

Without that approval, Wu’s administration projects that residential property owners would see their next two tax payments — for the fiscal year that began in July — go up in quarter-to-quarter bills by 28 percent. For the average single-family home, that would mean an increase in the next tax bill from $1,380 to $1,765. With the adjustment, there would still be an overall increase for residential property owners, but it would be smaller.

In a letter to councillors on Oct. 15, Wu committed to a “compromise” in the form of an executive order. This included going along with the House ceiling of 190 percent of assessed value for the commercial property class—down from a maximum of 200 percent in the home rule petition passed by Wu and the city council. Wu’s order would also shorten the maximum duration of the tax rate adjustment from five years to three, along with providing new forms of relief for businesses exposed to higher tax bills.

At a hearing two days later, members of the council’s Ways and Means Committee alternated between defending the mayor’s actions and calling for budget cuts, as well as suggesting additional forms of revenue. The committee chair, District 4 (Mattapan/Dorchester) Councillor Brian Worrell, who had opposed the home rule petition in June, suggested that a compromise was within reach between the mayor and the State Senate.

“I know the mayor has compromised down to 190 percent with the House,” Worrell said at the beginning of the hearing. “And it’s my understanding that there might be 185 percent offer on the table in the Senate. As someone who voted against the property tax shift in June, because I thought 200 percent was too high, and as someone who thought 190 percent was a better number, I urged the sides to reach that compromise on the 185 percent that was first suggested in the spring hearing earlier this year.”

The hearing was to consider measures by Councillors Ed Flynn, Julia Mejia, and Erin Murphy to provide tax relief for homeowners and get additional city revenue from surcharges. Flynn mentioned the possibility of a small local sales tax or food and beverage tax. Reaffirming his opposition to Wu’s home rule measure, he also called for budget cuts and a hiring freeze.

“With the continued uncertainty in our economy, due to the effects of post pandemic inflation, higher interest rates,” he argued, “the city should first show our commitment to fiscal responsibility by examining areas to tighten our own belt.”

The tax adjustment sought by the city at the State House has been strongly opposed by business groups, but there was strong support at the council hearing from leaders of unions representing Boston’s police, firefighters, and emergency medical responders.

During the hearing, Council President Ruthzee Louijeune reaffirmed support for the tax rate adjustment but called for exploring other steps.

“I am in support of this legislation because I think it’s important to our residents,” she said. “I also think that there are limited ways that we can raise revenue, and this council is trying to think about some, how can we be more creative and explore what we’re able to do outside of the bounds of home [rule] authority.”

Wu’s administration has noted that, even with passage of the tax rate adjustment, commercial properties with a greater loss of value, as in parts of downtown Boston, would be less exposed to higher tax bills, or maybe even have lower bills. But the adjustment would pose a burden for businesses in other parts of the city, according to Randi Lathrop, a South End resident, government relations consultant, and volunteer member of the South End Business Association (SEBA).

In her testimony, she highlighted the effect on business tenants with “triple net” leases. “Triple net will drastically affect our ground floor retailers and our commercial businesses in the South End,” she warned. “Many of them will leave, and we’ll end up getting national retailers, which will totally change the composition of our local neighborhoods.”

An official with the Boston Redevelopment Authority for 26 years, Lathrop recommended budget-tightening, comparable to moves by former mayor Thomas Menino during the economic downturns around 2002-2004 and a few years later, during the great recession. “Every department needs to cut,” she insisted. “There needs to be a hiring freeze, ASAP.”

In 2003, with the value curve for commercial property lagging further below the continued rise for residential parcels, Menino tried to get approval at the State House for a tax classification adjustment cited by Wu as a model for her home rule petition. A modified version of Menino’s measure was approved in early 2004. Thanks to the adjustment, tax bills for residential owners that would have gone up in the first year by more than 41 percent increased by less than 14 percent.

In April of 2003, the first version of Menino’s budget for the coming fiscal year had already called for $73 million in cuts across several agencies—from parks and libraries to police, fire, and school departments. When the budget was filed, the city was also faced with a significant increase in the cost of health insurance for its employees and an expected $100 million drop in state aid. Some of the cuts were reversed in the final version of the budget, when it became known the state cut would be much smaller.

But Menino did not cut back total city spending below the maximum levy allowed by Proposition 2½ — a point emphasized by Wu and her top officials. According the mayor’s chief financial officer, Ashley Groffenberger, Menino’s cuts were not just a show of austerity to win support for his tax classification adjustment. “The city did not implement spending controls because they had sought this legislative relief,” she said. “There were other things happening at the time, and mostly driven by a loss of state aid.”

Above, Boston Mayor Thomas M. Menino announced austerity measures during a April 2009 press conference about the FY2010 budget he was filing with the City Council. Chris Lovett photo

In response to the “great recession” acknowledged in 2008, Menino also announced layoffs and called for a wage freeze in the budget filed with the City Council in 2009, almost three months before the start of the 2010 fiscal year.

Unlike in Menino’s third term, the Oct. 17 discussion of possible cuts this year was taking place almost three months into a fiscal year. The $8.64 billion budget filed by Wu and approved with minor changes by the council in June called for a spending increase of about 8 percent, a figure that included the shift of personnel from the nominally independent Boston Planning and Development Agency to Wu’s new city department for planning.

The deputy director for the city’s operating budget, James Williamson, said the bulk of the added personnel was in the Boston School Dept., and that the increase also reflected hires for positions that were left unfilled during the pandemic.

In her letter to the council, Wu itemized nine possible budget cuts that could generate $265 million, enough to offset the spike in residential tax bills should the home rule petition fail to get approval in the State Senate. She said that because of “contractual and legal obligations and the disruption of layoffs,” the cuts would have to fall on workers not yet hired or programs not yet in operation. She also contended that savings from a one-percent budget cut—one of the recommendations from the Boston Municipal Research Bureau—would have to be split between property classes, with a larger rate cut required for commercial owners.

In testimony at the hearing, the director of the Center for State Policy Analysis at Tufts University, Evan Horowitz, advocated cuts to fund tax rebates, a possibility that Groffenberger stopped short of ruling out altogether. “But from what we can tell,” she noted, “rebates to special groups would potentially violate state law and potentially create a constitutional issue for us.”

Without Wu’s proposed tax shift, residential owners would currently be faced with roughly the same annual percentage increase in their bills enabled by Menino’s adjustment in 2004. The difference in 2025 is that the dollar amounts will be higher and start in the middle of a fiscal year, forcing residential owners to absorb the year’s increase in two quarterly bills.

The tax shift that Menino deployed in an economic downturn was also eased by a quick recovery and low interest rates. Wu’s adjustment would come during a period of steady growth and moderating inflation, with the downturn confined to parts of the commercial tax base. Studies show a similar pattern in other US cities, while noting that Boston could be more vulnerable because of its higher share of dependence on revenue from property taxes.

“Just as when a tax shift was used in 2004,” Wu wrote in her letter, “this is not a moment of economic crisis or recession, but of wider transition in the shared burden of property taxes across the residential and commercial sectors.”

The Wu administration has also stressed that the city is not faced with a revenue shortfall, since it would still be allowed to collect the maximum levy allowed on its property tax.

In a February report, the Boston Policy Institute (BPI) had projected a “revenue shortfall” of as much as $1.5 billion through 2029—a figure expressing a difference between an expected drop in commercial property values and a continuation of the trend for higher prices and tax yield in previous years. At the hearing, Assessing Commissioner Nicholas Ariniello disputed the methodology, noting that rates for different property classes typically change every year. Depending on the overall assessed values, rates for different classes are typically readjusted every year, with a corresponding shift of balance in the tax burden.

“We are not in the middle of a budget crisis,” said Ariniello. “The whole budget crisis concept and the revenue crisis concept comes from people that fundamentally don’t understand how our tax system works. That report that came out that we heard about again today talks about a system where residential rates and commercial rates stay the same.”

Ariniello declined to speculate about changes in value beyond the current fiscal year, but Groffenberger told councillors that the tax revenue split between property classes, previously close to 70 percent from commercial and 30 percent from residential, has approached a 60-40 ratio, with the rising share of the burden on residential property.

“Given many of the dynamics that we’ve been talking about, with the change in office value and the impact of vacancy and the other macroeconomic factors that are bringing us to this hearing today,” she ventured, “we will continue to see this narrow. There’s no doubt about it.” In that case, without new revenue sources or curbing historic levels of growth in the tax levy, the city would have to increase the burden on residential owners—barring a downturn in residential values.

The co-founder and executive director of the BPI, Greg Maynard, told councillors that the city’s projection of a 7 percent drop in commercial property values this year was ahead of the pace for group’s expectation of a 25 percent drop by 2029.

“BPI’s report does not expect that the commercial real estate market will hit bottom until 2029,” he said. “That means this year’s decline in commercial property value and the subsequent increase in residential property taxes is not a one-time event, but rather will continue happening for the coming years.”

In one positive metric, Wu announced in September that the number of people working at offices in Boston increased this year by 10 percent. Recent figures show Boston’s drop in population, accelerated by the pandemic, has slowed and begun to reverse. Recent improvements in crime figures and MBTA service also contradict the story line associated with an “urban doom loop.”

But there were negative metrics on Oct. 15, when the commercial real estate firm Cushman & Wakefield reported a continued increase in the Boston area’s office vacancy rate, with decreases in net absorption and new construction. The firm’s quarterly report showed an area-wide vacancy rate of 17 percent, with net absorption year to date at– 4.6 million square fee – that is, more square feet being vacated than being leased.

By contrast, the firm’s last quarterly report from 2019 described a fast-paced market with “tight conditions.” The vacancy rate was only 4.7 percent, with positive net absorption, declining vacancies, and a continued increase in asking rents, which rose in 2019 by 15 percent.

In the third quarter of 2024, the office vacancy rate was 21.5 percent in Boston’s Financial District and 20.3 percent in the Midtown/North Station District. Both subdistricts posted negative net absorption, and they account for 60.9 percent of the office square footage in Boston’s central business district.

According to the quarterly report, asking rents in Boston’s central business district “began to soften,” despite an uptick in leasing activity. Even asking rents for more desirable “Class A” office space decreased for the fifth consecutive quarter, with a drop of 5.5 percent from a five-year high one year ago. And the decline was steeper in the city than for office space in the suburbs.

In May 2024, a study by the Tax Policy Center—a collaboration of the Brookings Institute and the Urban Institute—showed Boston surpassing all other cities for the percentage growth during 2013-22 in the share of general revenue from commercial property taxes. It also surpassed all other cities for the fall-off in projected tax revenue from commercial property through 2031, compared with the higher growth from 2013-2022.

Boston also led 11 other US cities for dependence on commercial property tax revenue in a graph included in a June 26 article for the research journal Vital City by Stijn Van Nieuwerburgh, a professor of real estate at Columbia Business School, and Arpit Gupta, an associate professor of finance at NYU Stern School of Business. Van Nieuwerburgh is more widely known for formulating the “doom loop” scenario triggered by declining office space values.

The two researchers suggested ways to avoid the “doom loop,” such as updates to make office space more desirable, conversions to other uses, along with investments in public safety, public transportation, and “vibrant neighborhoods.” But they also cited national surveys indicating that post-pandemic increases in office visits were plateauing, with business office use becoming more streamlined. And the researchers maintained that more recent data had “caught up with” their 2022 prediction that value for urban office would drop by 50 percent.

“In other words,” they concluded, “we are only at the beginning of absorbing the impact of the decline in commercial property values on cities’ budgets.”

Chris Lovett is a veteran Boston journalist who has covered Dorchester and City Hall since the 1970s. He is the former anchor and news director of BNN-TV’s Neighborhood Network News.

A current-day view of vintage office buildings on Franklin Street in Boston. Chris Lovett photo