Alliance of Boston Neighborhoods

1. Boston's Tax Crisis (PowerPoint - HTML)
2. Property Tax Exemptions (PowerPoint - HTML)

Boston's Tax Crisis
Steve Wintermeier
By Day: Midtown Office Worker
By Night: The Tax Man

Prayer of Serenity

• Lord,
  grant me the serenity to accept the things I cannot change,
  the courage to change the things I can,
  and wisdom to know the difference

Residential property taxes are likely to double over the next 5 years

• Why? How is it possible for my taxes to go up 15% every year?
• What is being done?
• Is there anything we can do?

Total budget:

• $1.9 billion

Where does the money go?

Where does the money come from?

Why is this happening?

• Taxes are a zero-sum game between residential and commercial properties and the residents of Boston are losing the game
• As commercial values stagnate and residential prices skyrocket, our 'piece of the pie' increases.
• As a greater and greater percentage of property is owned by tax exempt organizations, taxpaying property owners have to pay more

How are taxes calculated?

• 3 step process

Step 1
Determine the levy

1. Fiscal '04 Levy = $1.092 billion
2. Multiply by 2.5% = $1.119 billion
3. Add new development = $25 million
Real estate and personal property
4. Total Levy = $1.144 billion

Step 2
Calculate the base rate

4. Total Levy = $1.144 billion
5. Total Property Value = $66 billion
6. $66 Billion/1.144 billion = $16.88

Time Out

Classification

Classification is a premium placed on commercial property assessments that effectively "shifts" the property tax burden onto commercial properties
Traditionally 175%

Classification Schedule

• 2004 -- 200%
• 2005 -- 197%
• 2006 -- 190%
• 2007 -- 183%
• 2008 -- 175%
• 2009 -- 170%

Step 3
Apply classification

2005 classification rate of 1.97
$16.88 x 1.97 = $33.26

Commercial Liability
$21.8 billion x $33.26 = $744 million

The residents pay the balance of $400 million

Even if property values stabilized right now, the change in classification alone would push residential taxes up over 60% by 2009

Conclusion

• Commercial property assessments will at best be stable over the next 5 years and could likely decline based on current market trends
• Residential property assessments will increase over the next several years by over 20%
• The shift of the burden is magnified by the decline in the classification rate
• Result will be increased taxes of 85-125%

Will anything stop this?

• Rise in commercial values
  • Commercial values have to rise substantially to offset the classification rate drop
  • We have 9 million sf of empty office space that in the best of times would take 6 years to "absorb"
• Decline in residential values
  • Housing prices would have to decline by over 30% to keep tax increases to 5% per year

What is being done?

• Cap rate is the last bullet
  • Cap rate decreases - lowering the value of commercial property and their share of taxes

What can't we do?

• Increase the classification rate
• Tax non-profits
• Increase the residential exemption

What can we do?

• Any changes in the system must be granted by Beacon Hill. Property tax systems are established by the state and only enforced by the municipality.

Solutions

1. Property taxes for ALL properties should be based on sale price with an option to "recapture" gains at the time of sale
2. Property taxes should be based on a reasonable escalation from taxes at purchase
3. Personal property assessments should not be permanent additions to tax base
4. Split classes or put floors and ceilings on levels of commercial and residential taxes
5. Increased PILOT participation
6. Statutory limit on amount of tax-exempt property
7. Use of non-profit facilities and personnel classrooms and student tutors (SILOTS)
8. 100% gains tax on capital gains of sales of tax exempt property

There will always be death and taxes; however, death doesn't get worse every year. --Unknown

Boston's Tax Crisis: Property Tax Exemptions

• Exemptions
• Abatements
• DIF's TIF's and WHAT IF's

Exemptions -- or How the Other Half Lives

• More than half of Boston property is exempt from the payment of real and personal property taxes (53%).
• In 2002 the mix was:
  • Residential Land: 10,228 Acres
    35%
  • Commercial Land: 4,269 Acres
    15%
  • Tax Exempt: 14,688 Acres
    50%

Assessments: Major Categories FY 2004

Exemptions:

"A privilege allowed by the General Court of the Commonwealth."
Over 50 exemption provisions are permitted.
Releases an owner from the obligation to pay all or a portion of the taxes assessed on a parcel of property.
Recognized only where property use or individual status clearly falls within the terms of the exemption.

Types of Exemptions

• Miscellaneous:
  • Cemeteries
  • Solar & Wind Powered Energy Systems -- 20 yrs
  • Pollution Control Structures
  • See Mass G.L 59, Chapter 5 for a complete list.

• Government Property
• Federal property
• State Property
• Government Authorities: Port Authority; MBTA; Turnpike Authority
• Charitable; Religious Organizations
• Chapter 121A Exemptions

Exemptions:

• Tax Exempt Property Ownership
  • Commonwealth of Mass: 7,519 Acres
    26%
  • City of Boston: 4,212 Acres
    14%
    • Includes 331 acres -- Property Tax Foreclosures
  • Medical & Educational: 661 Acres
    2%
  • Other Charitable: 2,296 Acres
    8%

Exempt Property Owners

• Colleges & Universities
  445 Acres; 1.5% of Total City Land;3% of Tax Exempt
• Medical & Scientific
  216 Acres; .7% of Total City Land; 1.5% of Tax Exempt
• Cultural, Museums, Private Elementary
  410 Acres; 1.4% of Total City Land; 2.8% of Tax Exempt
• Cemeteries
  768 Acres; 2.6% of Total City Land; 5.2% of Tax Exempt
• Religious
  285 Acres; 1% of Total City Land; 1.9% of Tax Exempt
• Benevolent
  86 acres; .3% of Total City Land; .6% of tax exempt
• Other: 121 A Contracts
  747 Acres; 2.6% of Total City Land; 5.1% of tax exempt

How Do Exemptions Affect Our Tax Bills?

Property Tax Revenue -- Critical

• Cities and towns in Massachusetts are primarily dependent on property tax revenues to fund the delivery of services.
• FY 2002 Boston Budget Revenues:
  • State Aid: 27.7%
  • Fees/Local Option Taxes: 12.6%
  • Investments/Non-recurring: 7.9%
  • PROPERTY TAXES: 51.8%
• For FY 2004, Boston's dependency on property tax has risen from 51.8% in 2002 to 59.9%.

Boston's Property Tax Crisis

• 100% of the Property Tax Revenue comes from less than half of the city's property.
• The cost of providing services for all of the City falls primarily on the tax-paying owners of only half of it.
• More than half of the Boston property that is exempt is dedicated to public uses for people throughout the region, i.e. property owned by the Commonwealth.

Exemptions: Funding and Reimbursement

• Massachusetts: Cities and Towns receive no financial reimbursement from the state for real property which is exempt.
• Connecticut: Cities and towns are partially reimbursed by the state, depending on tax exempt use. Requires an annual appropriation.
• Rhode Island: Similar provisions to Connecticut

Boston's Property Tax Crisis: Potential Revenue Sources

PILOT -- Payment In Lieu Of Taxes

• Exempt Institutions Utilize City Services:
  • Police
  • Fire
  • Public Works
  • Public Health
• PILOT encourages tax-exempt institutions to contribute to defraying the public expense associated with the institution.
• PILOT is a moral obligation, not a statutory one.
• Municipal Demand for PILOT
  • Dependent upon:
    • The amount of tax involved
    • Level of existing municipal fiscal distress
    • Degree of purely local benefit from non-profit activities
    • The nature of the non-profit service
    • The lobbying power of those adversely affected.
• Non-Profit Resistance to PILOT
  • Factors affecting tax exempt owner resistance:
    • The dollar amount at issue
    • Potential for erosion of exemption
    • Public relations
    • Fear of future, worse treatment
• The Effects of Exemptions for Institutions
  • Rent vs. Own decision
  • No incentive to avoid high tax jurisdictions
  • Financial incentive to expand; acquire property
• PILOT in Massachusetts
  

• FY2003	Total Statewide
  Charitable& Educational Value	$ 22,098,752,575.00
  % of Total Exempt Property	26.01%
  Projected Tax Payments	$ 505,863,999.00
  Actual PILOT	$ 17,894,347.00
  Percentage: PILOT to Taxes	3.54%
  LOST TAX REVENUE:	$ 487,969,652.00

   

• Payments in lieu of taxes:
  

	FY 98	FY 00	FY 02	FY 03
Boston Housing Authority	$410,984	$595,145	$390,358	$509,113
Boston Symphony Orchestra	$0	$30,199	$35,557	$36,306
EDIC	$0	$157,000	$329,000	$400,000
Harvard University	$1,287,534	$1,465,197	$1,479,398	$1,567,198
Marriott Custom House Tower Timeshare	$90,705	$242,656	$250,806	$254,286
Museum of Fine Arts	$42,000	$40,682	$42,709	$42,805
Northeastern University	$580,350	$140,107	$136,021	$136,020
Massport	$10,253,847	$10,501,526	$7,306,186	$10,903,054

• PILOT in Boston:
  

FY2003	Boston
Charitable& Educational Value	$ 4,816,894,343.00
% of Total Exempt Property	26.21%
Projected Tax Payments	$ 159,728,216.00
Actual PILOT from 904 & 905	$ 10,383,022.00
Percentage: PILOT to Taxes	6.50%
LOST TAX REVENUE:	$ 149,345,194.00

• FY 2004 Boston City Budget:
  

Expenditures		Revenues
Library	23 M	Property tax	59.9%
Health Insurance	125 M	State aid	20.6%
State	67 M	Licenses, fees, fines, permits, 121A payments Excises Pension reimbursement	Remainder
Assessment	131 M
Fire	210 M
Police	2.6 M
Election	12 M
Parks	7.7 M
Public Works	58 M
Debt service Pension	135 M

Boston's Property Tax Crisis: Other Exemptions

• Chapter 121 A
• Chapter 40 Q -- "DIF";
• Chapter 40 R -- Housing "TIF"

Chapter 121 A

• M.G.L. Ch 121A Provides for the creation of:
  • Single purpose, project specific, private URBAN RENEWAL CORPORATIONS.
  • Undertake residential, commercial, civic, recreational, historic or industrial projects in decadent, substandard or blighted open areas.
  • Exemption from real and personal property taxes, betterments and special assessments.
  • Allows private developers to exercise EMINENT DOMAIN in specified circumstances.

• 121 A Agreements are used to encourage:
  • Development in places with high property tax rates
  • Development in areas that are minimally marketable as locations for private investment
  • Development of housing for low and moderate income families

• Duration of 121 A Agreements:
  • Minimum of 15 years
  • Subsidized low-mod income housing -- 40 years
  • May be extended up to an additional 25 years if developer offers "amenities"
    • Handicapped Facilities
    • Employment of minorities or neighborhood residents
    • Preservation of open space
    • Rehabilitation of historic building

• Substitute payments in lieu of taxes: 3 types required:
  • Minimum Statutory Payment -- Paid to MASS DOR
  • Negotiated Payments -- Paid to MUNICIPALITY ("Section 6A Agreements")
  • Excess Income Payment -- Excess profits, after payment of 8% ROI and all eligible expenses. Paid to MUNICIPALITY, up to property tax level.

• Property that is under a 121A agreement does not have its value counted in assessments of municipal land

• Changes and Terminations
  • Material Changes require written amendments to agreements
  • Change in ownership: Permitted. Requires assumption agreement by new owner. Not automatic.
  • Terminations:
    • Foreclosure
    • In accordance with the terms of the 6A Agreement

Chapter 121A Developments

• World Trade Center Expansion 1996
  • Seaport Hotel
  • Two Office Towers
• South Boston Waterfront Hotel 2002
  • Marriott Hotel
• Fleet Center 1992
• Landmark Center 1996
  • Cinema, office, retail, parking
• Paine Furniture Building -- Arlington St. 1998
  • New office tower and redevelopment of Paine
• Lafayette Mall -- Downtown Crossing 1997
  • Redevelopment for office and commercial
• Macy's -- Downtown Crossing 1999
  • Combined retail and other commercial use
• Allston Landing/Genzyme Corp. 1992
• One Beacon Street/Prudential 1969
• Egleston Center, J.P. 1995
• Brigham & Women's Parking garage, commercial and office space, materials handling center, pedestrian park 1979
• MATEP, Inc. -- Longwood Medical Area energy plant and related offices. Harvard/Advanced Energy - 1977
• Post Office Square 1984
  • Multi-level below grade parking facility
  • Surface park
• New Boston Food Market 1967
  • Relocation of meat and food vendors from Quincy Market

Chapter 121A Housing

• 88 Properties in Boston
• 11,297 Apartments
• Many with Section 8 Project-based Assistance
• Housing Developments assisted with 121A sometimes pay MORE than they would otherwise due to formula.

Chapter 40Q -- "District Improvement Financing" or DIF
Eminent Domain; Tax Expenditure and Urban Renewal

• District Improvement Finance Program
  • Enables municipalities to finance public works and infrastructure by pledging future incremental taxes resulting from growth within a designated area.
  • The incremental growth ("Tax Increment") in taxes is set aside to pay the debt or bonds used to finance the new construction.

• Chapter 40 Q DIF: Key Highlights
  • DIF creates a district as small as one parcel, or AS LARGE AS 25% OF THE MUNICIPALITY.
  • DIF allows eminent domain to acquire private property for resale to a developer.
  • DIF is NOT exempt from Prop 2 _ levy limits
  • The bonds issued to support construction in a DIF district may be secured by all of the city revenue!
  • DIF does not increase taxes, but it freezes the assessment of the designated district for up to THIRTY YEARS.
  • Any increase in value is "captured" and utilized to pay off the district debt. DIF is a "Tax expenditure."
  • If the costs to operate the city rise over 30 years, the DIF district will only contribute at the "frozen" level -- the original assessment.

• The Pittsburgh Experience
• • $138 MN tax increment financing project to renovate a department store and create office space.
  • The resulting increase in value: Only $38MN.
  • TAX PAYERS HAD TO PAY THE $100MN DIFFERENCE FROM GENERAL REVENUES.

Chapter 40R -- Urban Ctr Housing Zones -- Tax Increment Financing

• Regulations are currently being drafted.
• As with District Improvement Financing -- the district tax base will be frozen and the revenue resulting from increases in value will be diverted to pay bonds.
• Another form of tax expenditure.

Solutions?

• Residential vs. Commercial -- Only half the story
• Residential + Commercial + Industrial vs. EXEMPT -- The real story.
• Issue of Fairness in Payments from the Commonwealth
• Issue of Fairness in Payments from Users of Services
• Increased scrutiny of tax exempt holdings and their relation to the mission of the exempt owner.
• Repeal of DIF, TIF