Tuesday, August 11, 2009

A primer on Boston Taxes

My friend Steve Wintermeier an Ivy trained financial analyst has put together this outline of Boston Taxes for our edification:

A primer on Boston's property tax increases - past, present and future:

Property taxes do not depend on the absolute value of your property. They depend on the relative value of your property. A simple example:

In a 2-person community you and your neighbor each pay $5000 in taxes and your houses are each worth $500,000. The government collects $10,000 in taxes and each "citizen" shares the burden equally. The next year the total taxes to be paid goes up 5% to $10,500 (the average annual property tax increase in Boston is actually greater than 5% and the increase for FY 2010 is about 4%). However, one house falls in value by 10% and the other falls in value by 20% so now you have one house worth $450,000 and another worth $400,000. Now the person with the more expensive home owns a bigger "piece of the pie". Instead of 50% of the burden, that person now owns 53% of the tax pie. Additionally, the total taxes have gone up by 5% and because his neighbor's values have gone down by so much he has to pay his higher share PLUS the entire tax increase. So now in our little 2-person community the owner of the more expensive home has to pay about 10% more taxes even though the value of his property has decreased by 10% and the other owner, even though the value of his property has decreased by 20%, still pays about the same taxes.

Why is this relevant? Essentially in Boston we have a 2-person community. But instead of 2 homes, we have residents and businesses. Making matters worse, in Boston we don't have a 50/50 split between businesses and homes. The businesses pay almost two-thirds of the taxes. That means that every 1% decrease in business taxes translates roughly to a 2% increase in residential taxes. While residential values continue to fall modestly (5-10% over the past year), commercial values, especially values of class A office space which dominate the commercial property sector, have cratered by possibly as much as 40% over the past twelve months.

Taxes for a fiscal year are based on values as of the first of January, so the bills we will get in December (conveniently after the election) will reflect values as of January 1, 2009. If we assume that residential values have indeed fallen by 10% and commercial values as of January 1, 2009 are down by just 15% over the previous year (probably a best case scenario), residents can expect an 11% tax increase on average. Without getting further into the math, for those enjoying the residential exemption the percentage increase will be even a few percentage points higher. Of course this is an average. Residents in areas hard hit by foreclosures may not see an increase, or even receive a slight decrease. But that means that residential taxes in other parts of the city that have not been hit by the downturn as hard (Charlestown, South Boston, West Roxbury, Jamaica Plain, downtown etc.) will potentially see larger increases, possibly in the 15-20% range. This is on top of the roughly 100% increase in property taxes incurred by Boston residents over the past 10 years. Taxes in the city historically were much lower than a comparable property in the suburbs, now they are about the same and grow at a faster rate due to these periodic shifts to the residential sector from the commercial sector.

This is a very complex process, especially on the commercial side, so at this point one can only rely on estimates of valuations posted in the papers and tax assessments due to timing issues and assessment methods do not correlate exactly to this information. However, the city's practice of building an ever expanding commercial tax base (which results in substantial levels of new taxes) to service an essentially flat population (which means no true new value is created) is a long term recipe for disaster. This has quite predictably manifested itself in the tax burden shift from commercial to residential earlier this decade and in the budget dilemma we face now as our local politicians built in budget increases without a supporting economic foundation (as previously noted, there is no budget "shortfall". Next year's budget will actually increase, just not by the 6% rate that the mayor and city council needed to fulfill all the promises and pay raises they handed out).

This type of fiscal attack on Boston's taxpayers must come to an end. Menino, Flaherty and Yoon's constant demands for incremental revenue essentially treat the residents, businesses and institutions of Boston like an ATM to service the needs of government forgetting the basic tenet that government is there to serve its constituents, not the other way around. It is my campaign's understanding that the preliminary data necessary to more thoroughly evaluate the impact of the current market turmoil on the residential property taxes for the citizens of Boston should be available in late August and we call upon the city to make this information available to the people at the earliest opportunity so that Boston residents can prepare for the likelihood of significantly higher property taxes in 2010.

Summary for 2010:

If residential values go down by 5% and:

commercial values go down by:5% - total residential taxes increase 5%
commercial values go down by:10% - total residential taxes increase 11%
commercial values go down by:15% - total residential taxes increase 18%

If residential values go down by 10% and:

commercial values go down by:5% - total residential taxes DEcrease 2%
commercial values go down by:10% - total residential taxes increase 5%
commercial values go down by:15% - total residential taxes increase 11%

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