Argument

In February, 1.5 million people went to New York City to see the 16-day public art project, “The Gates.” I asked my economic team to study what the fiscal impact of a Gates-like public art project would be if held here instead of New York. My team came up with some troubling numbers. If 90,000 visitors came to New York and stayed in hotels overnight to see the project—as the New York City Economic Development Corp. had estimated—then New York reaped some $2.4 million in estimated tax revenue. If the same number of visitors came to Boston to see a similar project here, our city would garner a lower proportion of the proceeds, roughly a half-million dollars.

Special events, such as “The Gates” or the 375th birthday celebration we will hold for our city this year, drive cities forward. They have value in and of themselves in attracting visitors to our city. They reflect the progress we have all made in making Boston a city that works in the 21st century. Boston is a global leader in biotechnology, life sciences, and financial services. While we have embraced the knowledge economy and capitalized on the brainpower nurtured in our institutions of higher education, we subsist on a revenue structure created in the 18th century.

Even as the city and its economy have seen dramatic change, the city has been held captive under a revenue system forged along with the state constitution in 1780. Within our municipal borders, doctors performed the first surgery aided by anesthesia and Alexander Graham Bell placed the first telephone call. In the time since these advances took place, the city has seen the advent of the personal computer, the rise of the Internet, and the development of vaccines for crippling diseases, such as polio. And still nothing has happened to alter Boston’s fundamental revenue structure.

Now, it is time to change all that. I have asked the Boston Municipal Research Bureau to conduct a special report on the local revenue structure in Massachusetts. This is a complex issue that requires thoughtful economic analysis. It also deserves new and independent thinking. Together, we need to identify the 21st Century revenue tools that will sustain Boston today and fuel our success in the future. We need to create a revenue structure that will support this world-class city—the city that propels our state’s economy.

Thanks to the state-imposed revenue structure, Boston must derive a significant portion of its annual revenue from property taxes. In fiscal year 2005, nearly 58 percent of the city’s revenues came from property taxes, followed by state aid at 24 percent. Excise taxes, permits and fees, and other departmental revenue represent the remaining 18 percent.

Outside factors make it difficult to keep up with rising costs. Energy prices continue to outpace our efforts to conserve, collective bargaining agreements handed down on us by arbitrators drive up our personnel costs, and employee and retiree health care costs have skyrocketed by double-digit increases each year. Insurance costs alone for FY06 will exceed $200 million. Further, state aid to Boston has been cut by $80 million over the last three years. (Even as the city has faced these increasing pressures, our fiscal management has won us a bond rating of “Aa1,” the highest in city history.)

Meanwhile, as Boston continues to thrive, the demand for city services grows in size and scope. Thousands of commuters travel to Boston each day to work in our businesses. Millions of tourists visit our city each year. And nearly 600,000 people call Boston their home. Together, commuters, businesses, tourists and residents make up the backbone of our vibrant city. To keep the city working for everyone, we must provide the public safety, education, and basic services that everyone expects and needs. And to keep the city attractive to the tourists, businesses, and residents of tomorrow, we must foster the activities that help make our city special and unique.

The fundamental mismatch between Boston’s sources of revenue and the public services that are demanded in the 21st Century is worsening. Historically, property determined value and wealth. Today, the value of a great idea, the value of an innovation in science or technology, is likely to be disproportionate to the value of the building or space in which it was developed. The knowledge economy has arrived, and human and intellectual capital have replaced personal, industrial, and commercial property as the drivers of our city’s success.

Boston must develop the tools to tap into these successes to diversify the city’s revenue streams—income streams that other cities already possess. For example, almost 50 percent of cities have their own sales tax, The Boston Globe reported in 2003. Many cities have other revenue-generating mechanisms—parking garage fees in San Francisco and Philadelphia, a meals tax in Denver and Atlanta. Getting tools like these will give Boston a level playing field with our urban competitors. This is what will help us maintain our hard-won status as a world-class city.

Boston’s business community understands the pressure on the property tax to deliver revenue for the city. It is an imperfect tool, but currently, it is the best one we have. A year ago, dozens of businesses stood with the city as we worked to pass legislation that would allow a temporary change in the tax classification formula and ease the dramatic effect of a soft commercial real estate market on Boston’s homeowners.

The city, and the country, benefited greatly from the boom years of the 1990s as we saw office towers and hotels break ground and housing stock appreciate beyond all expectations. When commercial values began to suffer under the recent recession, however, residents were forced to bear more of the burden of the tax levy, providing evidence of Boston’s over-reliance on the property tax.

Our restricted revenue structure creates challenges for the city, as we work to manage well and lead Boston into the future. And it creates challenges for businesses, as unfair loopholes in the state’s tax laws enlarge their property tax burden.

State agencies such as the MBTA and Massport are leasing space to commercial businesses on land that Beacon Hill has made tax-exempt. And telecom companies are using loopholes and antiquated exemptions to shelter an estimated two-thirds of their property from the local property tax.

When a select few don’t pay their fair share, Boston’s businesses and residents end up paying more. Given the financial challenges facing cities and towns, it is imperative that the state closely examine any and all property tax exemptions. I have filed legislation that addresses this issue, and I will be looking once again to Boston’s business community to support this measure, as businesses and residents alike will benefit from the closing of these loopholes.

This city stands here welcoming people from across the state and around the globe—giving them access to opportunities for employment, education, culture and healthcare. To continue to do that—regardless of economic cycles—we need to modernize and diversify Boston’s revenues.

Thomas M. Menino is in his third term as mayor of Boston.