Should Proposition 2½ get the ax? – The Boston Globe

Massachusetts tax revenue in April fell nearly $2.2 billion below the same month in 2022.

While Greater Boston may have been the poster child for commercial real estate’s boom times in the years between the Great Financial Crisis and the pandemic, the region’s office vacancy rate approached 20 percent at the beginning of this year — a 20-year high, the Globe’s Catherine Carlock reported in April.

Higher vacancy rates typically mean landlords float lower rents to woo tenants. This leads to lower property values — and less tax revenue.

“There’s a substantial decline in commercial real estate values underway, impacting the assessed values used for the tax base,” said Thomas J. Jensen, principal and executive director of Boston Appraisal & Consulting, LLC. “Increasing the commercial tax rates will result in a further decrease in assessed value … They can’t get blood from a stone. The gap between residential and commercial tax rates is likely to close.”

The poster child for commercial real estate cratering sits across the country, where a 22-story tower in San Francisco valued at $300 million in 2019 could sell at an 80 percent discount this year, according to The Wall Street Journal.

“We’ve been riding this fantasy for the last five or six years with skyrocketing commercial property value, and that was because the economy was good,” Jensen said. “It’s going to get ugly. It’s not going to be fun for any politician that has to pass a big tax increase.”

Plugging the gap means looking for new income streams — and perhaps revisiting a more-than-40-year-old statute that limits how much property tax local governments can collect. It’s a move that won’t be politically popular and almost certainly put pressure on homeowners across Massachusetts.

Proposition 2½ is the product of a 1980 statewide ballot initiative after years of hefty inflation in the 1970s. The measure limits how much property tax revenue a community can raise via property taxes. The measure states property tax revenues can’t increase more than 2.5 percent annually without an override majority vote.

But the teetering commercial real estate sector has some wondering whether Prop 2½ is eroding the ground of that budgetary cliff upon which cities and towns across Massachusetts may be sitting.

Communities rely on property tax revenue to pay for a wide range of measures, from government salaries to infrastructure, and wages have soared in recent years amid a highly competitive labor market and global supply chain breakdown.

“If there’s no new construction, then you don’t have that additional revenue and all you’re left with is that 2.5 percent incremental cap,” said Larry DiCara, a real estate attorney and former Boston City Council president. “In an inflationary environment, 2.5 percent is not going to be enough to take care of your municipal wage contracts. It’s just math.”

“There will be lots of 2½ overrides in the suburbs,” DiCara predicted.

Newton voters declined a Prop 2½ override earlier this year that would have gone toward closing a school funding gap, but the city passed them in 2013 and 2002.

Any commercial real estate revenue shortfall also puts more pressure on assessments.

“I could see things like assessors putting more effort into making sure they’re picking up renovations and coming out more immediately after a sale — things of that nature,” said Adam H. Langley, associate director of tax policy at the Lincoln Institute of Land Policy. “They’re just making sure that the assessments are accurate and not lagging and not trying to exaggerate values.”

But not every homeowner in Massachusetts will feel the sting.

“The impact of declining office property values is not going to affect all cities equally,” Langley added. “Certainly, in Massachusetts, I would expect a much greater impact in Boston than in bedroom communities where the commercial property tax base is really small.”

Commercial property tax revenue accounted for a little more than 27 percent of the total tax revenue in Suffolk County (home to Boston, Winthrop, Chelsea, and Revere) in fiscal 2023, according to the Massachusetts Department of Revenue. In Barnstable County, which spans all of Cape Cod, commercial property tax revenue accounted for only about 5.5 percent.

“I’m not saying that there isn’t a shift,” R. Lane Partridge, director of the town of Barnstable’s tax assessor’s office, said of potential declines in commercial property tax revenue. “But the impact is not huge because you’re talking about a very small percentage of the total tax base.”

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