Vacant office buildings create a tax revenue problem for cities
Vacant office buildings create a tax revenue problem for cities
We’ve talked a lot about how vacant offices have been tough on the commercial real estate market, and more recently lenders like New York Community Bank, which relies on commercial real estate loans for a big chunk of its businesses.
Of course, the biggest loser here is cities, and not just because empty offices mean empty business districts. The declining value of commercial real estate also creates a big tax problem. Take Boston. Over the next five years, that city could face a tax revenue shortfall to the tune of $1.2 to $1.5 billion, according to a new study from the Boston Policy Institute.
How much commercial real estate impacts a city’s budget comes down to a few things. One, how much office space it has. Two, how much the value of those offices have fallen. And three how much the city depends on those commercial property taxes.
“Here in Boston we are incredibly dependent on it,” said Evan Horowitz, who authored the Boston Policy Institute study. He says about 40% of Boston’s revenue comes from property taxes on commercial buildings, which is high compared to other cities. According to his calculations, Boston faces a commercial tax revenue gap of 10%. Cities like San Francisco and New York could also face a shortfall.
“It’s not the kind of thing you can address with creative accounting or kicking the can,” said Horowitz.
Cities could reduce services, though that can make a slowing neighborhood even less desirable. They could make money somewhere else — think traffic congestion pricing. But these are nickel and dime approaches. Cities like Boston need something big.
“The quickest fix would be to shift the burden onto residential. And of course that’s going to be very painful,” explained David Merriman, an economist at the University of Illinois, Chicago.
Painful for homeowners. And painful for politicians because, well, how many homeowners are going to vote for raising taxes? But it would make up for some of the shortfall. Merriman says closing the rest of the budget gap would likely be up to states.
“The big cities are the economic driving engine of every state. They’re generating actually a lot more revenue, state revenues, than is directed towards them,” said Merriman.
Of course, a state giving a bigger portion of its money to its buzzy city may be an unpopular move.
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