Mayor Menino’s call for greater revenue diversity, which he delivered at the Boston Municipal Research Bureau’s annual meeting, stems from the fact that the city of Boston is more dependent on the property tax than most other comparable cities in the country and has less local decision-making authority to do something about it. Despite the name, “home rule” governance in Massachusetts restricts cities and towns from making decisions that affect their operations unless specifically authorized by state law. Such restrictions distinguish Boston from most other major cities in the nation.
The city of Boston relies on the property tax for almost 58 percent of total operating revenue this fiscal year, as state aid, the city’s second largest revenue source, currently provides 24 per cent. Over the past four years, the state aid share of total revenues has declined while the property tax share has increased, bolstered by new growth. Indeed, over the past five years, the city’s property tax levy has increased by 5.8 percent a year, on average, due to new construction and, to a lesser extent, efforts to capture more personal property value.
The existing local tax structure in Massachusetts does not allow Boston to capture revenue from economic activity generated by the city’s role as a tourist destination, a convention city, and host of major events such as the Boston Marathon and Sail Boston. Receipts from the sales tax, meals tax, and liquor tax all go to the Commonwealth. Only a third—4 percent—of the 12.45 percent hotel/motel room occupancy excise tax is returned to Boston. From those funds, revenue from hotel rooms built after July 1997 must first go toward the city’s debt service for its share of the new convention center.
Any new consumption taxes that would allow Boston to tap its strength as an economic engine should be used to reduce its reliance on the property tax, not increase its revenue overall. The tax burden on homeowners is increasing and the tax burden on business is disproportionate, with business property representing 32 percent of taxable value but paying 64 percent of the tax levy. The city needs to carefully manage its spending, a task made more difficult by generous collective bargaining agreements, double-digit growth in health insurance costs, and increased spending for pensions.
Changes the Menino administration has asked for, in public statements and in its legislative package pending on Beacon Hill, reveal the complexity—and hazards—of trying to solve Boston’s budget challenges through taxes and other revenue measures applied only within city limits. For example, the mayor wants Boston’s medical and educational institutions to increase their payment-in-lieu-of-taxes (PILOT) contributions to the city even though these institutions are key drivers of Boston’s economic activity and their continued strength is vital to the city’s interests. The city also wants to tax hotels and commercial activity at Logan Airport like other commercial properties, even though Massport currently pays $11 million annually in PILOT contributions (an amount that is up for renegotiation) and receives no direct services from the city, instead providing its own fire, street maintenance, snow plowing, and water and sewer services paid for by the commercial leases.
The city has also filed legislation to change how personal property owned by telecommunication companies is valued by the Commonwealth. This is a complex issue that involves state economic and tax policy, not just property tax calculations.
Finally, the city is seeking approval to establish an excise tax for public parking spaces in Boston. In the past, this proposal has been rejected because the cost of parking in the city is already so high. Any increase in parking costs due to an excise tax would primarily affect suburban commuters, an impact that would be resisted by suburban legislators. Here’s another fact of “home rule” in Massachusetts: Only 11 percent of the 200 House and Senate members in the General Court represent Boston.
But it’s not just on Beacon Hill that Boston represents a small portion of the metropolitan area. With improved communication technology, it’s easy enough for businesses to locate outside the city limits and still enjoy most of the benefits of a Boston address. This is a factor that the mayor of Boston needs to consider in seeking greater taxing authority.
Even so, Boston, as a strong, viable capital city, is vitally important to the state’s economy. A state and local revenue structure that reflects today’s economy and service needs would benefit the city and the Commonwealth.
The Boston Municipal Research Bureau will respond to the mayor’s request for an independent study of the local revenue tax structure in Massachusetts. The last comprehensive study of state local finances in Massachusetts was undertaken in 1990 by a commission appointed by Gov. Michael Dukakis.
Samuel Tyler is president of the Boston Municipal Research Bureau.
Local taxes would be Boston add-ons, not alternatives
If we were starting the Commonwealth from scratch, local taxes of all sorts might sensibly be part of the revenue mix. New England’s over-reliance on the property tax is an anachronism, and Massachusetts’s extraordinarily high income-tax burden is a serious obstacle to attracting and keeping productive citizens. We could choose to have lower property and income taxes, substituting local taxes that would apply to visitors as well as to residential taxpayers.
Let’s look at some states that have local option taxes. We might want to emulate them in other ways. Like California, we could put a property tax limit in our state constitution so that it can’t be amended by the Legislature, maybe adding a provision that freezes taxable values. Like Colorado, we could have a taxpayer bill of rights that requires both local and state tax increases to be approved by the voters. We could follow the lead of Pennsylvania by dropping our income tax, now 5.3 percent, to 3.07 percent, or copy Georgia by reducing our state sales tax rate from 5 percent to 4 percent. We might cut our total per capita tax burden, which is higher than that in 47 other states, before loading it up with new city and town taxes.
But for some reason related to experience with Massachusetts tax proposals, I know that advocates of local taxes aren’t thinking in terms of substitution. They want to pile on more taxes overall.
Mayor Menino wants the state to allow him to charge a 10 percent tax on off-street parking, then make more money on meals and entertainment taxes for commuters and tourists. But will the state also make it easier to drive into Boston, and address concerns about the safety of the leaking Big Dig tunnels? In the 21st century, if city taxes get too high, Boston could face more telecommuting and location moves to the suburbs, which compete with each other for business and shoppers.
Of course, sports fans and culture patrons will always go to Boston no matter how much tickets, parking, and dinner cost, instead of patronizing local sports teams, community theater, and restaurants. Won’t they?
Mayor Menino envies the $2.4 million in estimated tax revenues that New York City “reaped” from “The Gates,” a public art project. But New York didn’t shut down during that exhibit, or the recent Republican convention, the way Boston did for the Democrats. If Boston attracted crowds with a similar art project, it would clear the way for them by discouraging ordinary commuters from coming into town, and increase the city’s long-term labor costs —even more—in order to keep labor peace while the visitors were here. Boston’s revenue structure isn’t the only outdated entity here. Massachusetts’s high-tax, union-based culture is another anachronism that gets in the way of having a “first-class city.”
The local taxing power desired by the mayor has been discussed for the rest of the Commonwealth too. A few years ago, I was a member of a commission to study alternatives to the property tax. Though certainly eager to find an alternative, we couldn’t get past the “freedom” problem: the fact that taxpayers would be free to live, work, and shop in the lower-tax communities, just as some shoppers now drive to no-sales-tax New Hampshire.Property taxes do influence decisions on where to make one’s home. Other taxes, business regulations, the infrastructure, the one-party political culture, the image of Massachusetts as it plays on the national stage—all of these influence business decisions to locate here, or not. Business leaders and potential tourists alike see the leaking Big Dig, hear the bellowing or preaching of Democratic US senators, remind themselves of the “Taxachusetts” label—and realize there are 49 other states to consider. Even our vaunted higher education institutions lose respect, as they allow political correctness to interfere with academic inquiry.
Charging its residents more to eat there, its workers more to commute there, and tourists more to visit there, won’t solve Boston’s long-term problems. Our capital city, with its unique historic heritage, attracts people with 18th-century landmarks. It needs to get its 19th- and 20th-century high-tax, big-government habits out of the way of its own 21st-century potential.
Barbara Anderson is chairman of Citizens for Limited Taxation and Government.