Meeting the Challenge: Examples of Boston’s Fiscal and Economic
Development Initiatives
Ronald W. Rakow, Commissioner City of Boston Assessing Department
Critical Issues for the Fiscal Health of New England Cities and Towns
April 8, 2016
Property Tax Reliance
• Property taxes constitute over
two-thirds of City revenue.
• No other major source of tax
revenue (e.g., sales tax, income
tax, payroll tax, etc.).
City of Boston FY16 Estimated Revenue
Property Tax 67%
State Aid 15%
Excises 6%
Other 9%
Licenses & Permits
2%
Interest 0%
Reserves 1%
Boston’s Fiscal Challenges
Source: City of Boston FY 2016 Proposed Budget
Boston is 52% Tax Exempt
• State Capitol
• 30 Colleges and Universities
• 25 Nonprofit Hospitals
• Over 20 Cultural Facilities
City of Boston Exempt Properties
Boston’s Fiscal Challenges
Proposition 2 ½
• Limits levy to 2.5% of total assessed value
• Limits growth in levy to 2.5% per year, with an
allowance for growth to the tax base.
• As a result, Boston’s annual growth in property
tax revenue typically ranges between 4% to 5%.
Boston’s Fiscal Challenges
Boston needs to be creative in both growing and preserving its property tax revenue
Highlight 4 Initiatives:
• Payment in Lieu of Tax (PILOT)
• Infrastructure Investment Initiative (I Cubed).
• Personal Property Audit Program
• Reduction in Tax Abatements and Appeals
Boston’s Fiscal Challenges
Disconnect between Benefits and Costs • Benefits spread broadly:
o City
o State
o Region
o World
• Costs are concentrated on Boston taxpayers o Reduction in revenue - $400M from “meds” and “eds” alone
o Costs of providing municipal services
PILOTs
PILOT Task Force Recommendations
PILOT Task Force
• Program to remain voluntary
• Nonprofits owning tax-exempt land valued in excess of $15
million are asked to participate in the program
• PILOT should be 25% of what institution’s tax-exempt property
would generate if fully taxed
• Nonprofits should receive up to a 50% PILOT deduction for
qualifying community programming to the unique benefit of
Boston residents
• Nonprofit should receive a credit for any real estate taxes paid on
institution-use property
• New PILOT formula to be phased in over a period of 5 years
starting in FY 2012
PILOT Program Results
$8.7
Economic Development Incentives
• Development incentives were all based on property tax abatements – TIFs, Chapter 121A, Pilots
• Downside – Reduced critical property tax revenue – State Government – which often received upwards of
80% of the new revenue generated by development (e.g. income, sales, hotel tax), often did not participate in incentive
Boston needed to change the paradigm
I Cubed Concept
■ Development generates new state income, sales, meals, and hotel tax revenue that can support infrastructure investment.
■ Community and developer determine a project’s economic feasibility and guarantee that state tax revenue growth will exceed debt service for the infrastructure.
■ State, community, and developers share risk and rewards.
Use public infrastructure investment to stimulate large-scale economic development
I Cubed Results
• Stimulates development without sacrificing critical property tax revenue
• Government role changes to building public infrastructure vs. providing tax subsidies
• Program is producing results: • Projects: Fan Pier, Boston Landing, Van Ness • 2 million square feet of development • Over 2,000 net new jobs • Over $75 million in new infrastructure supports
further development
Fan Pier
Boston Landing
The Van Ness
Personal Property
• Personal property: – the machinery and equipment used by
business – ranges from the chairs in a barber shop
to the poles and wires owned by a utility
• Self-reported by the owner on a tax return • In Boston the personal property tax was
underutilized – the forgotten stepchild of City revenue
Personal Property: Discovery
• Discovery process ensures a broader tax base and more equitable tax structure.
• Sources – New business filings with City clerk – Mining various databases containing business listings – Real estate tax returns (i.e., commercial property
tenants) – Staff awareness – Drone fleet*
• In the previous 2 years 295 non-reporting accounts were discovered yielding over $19 million in assessed value.
*we don’t really have a drone fleet
Personal Property: Audits
• A companion to the discovery process, the audit program was rolled out in 2009
• Audits compare personal property tax returns to company books to ensure all property is reported
• Results: – Over 1,200 audits complete – Individual assessments increased and decreased –
but net gain of $437.6 million in value (14%) for audited accounts
– Noticeable uptick in voluntary compliance revealed in more recent audits
– Fewer than 10 open appeals on audit cases
Personal Property Tax Revenue
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2009 2010 2011 2012 2013 2014 2015 2016
Mill
ions
Growth in Personal Property Tax Revenue
• Over the past 5 years, personal property accounted for approximately 8% of the levy…
• …but generated over 37% of the growth in tax revenues.
• The once forgotten stepchild is now punching well over its weight
Impact of Abatement Appeals
“Tregor” Era – 1980’s • Court ordered
abatements for large commercial properties
• Significant deficits in overlay accounts
• Bond rating teetering at junk bond status
Today • Appeal activity low • Court decisions support
assessment methods • Surplus in overlay • AAA Bond Rating
Impact of Abatement Appeals
Elements of a Successful Appeal Process: • Actively monitor and closely manage abatement appeals • Recognize Errors1 Early - Avoid Multi-year Payouts • When You’re Right, Fight
– Eliminate “abatement culture” – A win in a precedent setting case can eliminate similar appeals
• Get it Right the First Time – More Accurate, Responsive Assessments – Better Access and Utilization of Market Data
1In those very, very rare instances when assessors make an error
Impact of Abatement Appeals
Reactive vs. Proactive
• Previously, assessors spent nearly two-thirds of their time working on their– that’s like trying to drive your car using the rear view mirror
• The preferred scenario - focus on the current assessments and getting them right the first time
Appeal Backlog has Disappeared
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97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Thou
sand
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Outstanding Appeals
Virtuous Cycle
Vicious Cycle
Fiscal Impact of Reduced Appeals
• Since 2003 Boston has: – reduced its annual abatement overlay
from 5% of levy, to 2%, resulting in an additional $60 million per year in operating revenue.
– generated $378 million in overlay surpluses that were applied to the general fund