On Boston’s budget & tax relief proposal

And what it all means

The City budget is our annual roadmap through the next fiscal year (July 1–June 30) for how we allocate resources to make Boston a home for everyone. It’s a detailed breakdown of our plans, line by line, department by department, for safety, health, opportunity, and community.

Given a limited amount of funds, not everyone will agree on which issues should be prioritized over others, and which departments’ budgets should grow or shrink. Healthy debate is important, as policymakers should be accountable for the choices we make. But for these conversations to be constructive—and result in better outcomes for our communities—they must be grounded in facts. 

Right now, there’s a lot of confusing and misleading information out there about our budget, our residential tax relief proposal (H4805, “an act relative to property tax classification in the City of Boston”), and how the two are—and aren’t—related. 

One of the most frequent assertions is that the City is irresponsibly budgeting for an 8% increase in spending while asking to “raise” taxes on struggling commercial properties to pay for it. 

The truth is, that’s just not how our budget and tax system work.

First off, even though the 8% figure continues to be mentioned misleadingly in media reports, this is not the accurate number for new spending. It reflects the increase in budgeted dollars between this year and last year, but it includes a full 1% of preexisting spending and funding as we fulfilled our pledge to transform the BPDA into Boston’s first official Planning Department in seven decades. This one-time, major shift in organizational structure transfers personnel and revenues from the formerly off-the-books agency to run through the City budget instead of separately—it balances out and is revenue-neutral. That means the most comparable number for spending growth is actually 7% this year (last year’s growth was also about 7%).

The next big important fact: under MA state law, all municipal governments must have balanced budgets—meaning we can only spend what we have. So budget planning always begins with calculating available revenue based on how our funding sources shrink or grow compared to last year. After that, we allocate spending between departments based on that funding total. In other words, the 7% growth in spending comes from 7% growth in revenues, unrelated to any tax proposal.

FY 2025 Revenues

So how did our traditional revenue sources grow by 7% compared to last fiscal year? 

FY2025 Breakdown of Total Revenue Sources

We saw 5% growth in net property tax revenue (our biggest funding source) and significantly more growth in our other funding sources. Some details and examples:

Property tax revenue from existing buildings: increased 2.5%

Most of our municipal revenue comes from property taxes, which are significantly limited by Proposition 2.5, (or “Prop 2½”).  This state law restricts the total amount in property taxes that cities can collect to just 2.5% more than the prior year, plus “new growth,” or the dollar amount added to the tax levy to reflect additions to the tax base from the prior year. 

Property tax revenue from new growth: $60M

This revenue from additions to the tax rolls includes new developments that open for residential or commercial use, new construction or renovations that boost property values (e.g. adding a deck to the back of an existing house), or subdivisions (e.g. turning a three-family home into three separate condo units). This expands our tax base for all future years but is not shown as a percentage increase from last year because it is brand new revenue. Combining our conservative estimate for new growth with the 2.5% increase over last year on existing properties, in FY25 overall net property tax revenue increased by 5%.

Excise tax revenue: increased 15%

More than $280M of budget funding comes from excise taxes that follow economic activity. These include a portion of state taxes on meals (+12% growth), hotel stays (+20%), and cannabis sales (+49%), as well as City excises on motor vehicles (+10%) and jet fuel (+10%). When economic activity grows, these revenues increase. We budget based on actual trends with data on tourism, consumer spending, and inflation.

Interest on investments: increased 245%

A portion of the City’s cash reserves are invested into interest-bearing accounts. We’ve all seen the stressful impacts of record-high interest rates slowing down construction financing and new housing projects across the country. Another impact of record-high interest rates has been much higher returns for City accounts. We’ve adjusted our historically lower estimate to reflect these rates, while also planning for this to be a temporary bump as rates are expected to come down in the months ahead.

PILOT payments: increased 11%

The voluntary payments from tax-exempt organizations such as universities and hospitals help cover the City services that these institutions also benefit from. The requested amount grows by 2.5% each year. We budget $57M for this line item, reflecting an adjustment in line with recent payments and continued strong participation from institutions.

Licensing, permitting, and administrative fees: increased 11%

These are much smaller sources of revenue, but an additional $22M of revenue comes from projected growth in funding from small fees on transactions such as birth certificates and wedding licenses, parking tickets, building permits, licenses, etc. These are also based on recent trends and generally reflect economic activity.

Chapter 121A properties: increased 24%

Certain affordable housing developments and others that qualified for tax breaks over previous years have separate agreements for how much they will pay in taxes year by year. As different agreements expire, those properties also come onto the City tax roll. With stronger compliance and monitoring, our estimate has been adjusted to more closely reflect actual revenues collected in the last few years.

All this averages out to 7% revenue growth, plus the 1% funding transfer for the new Planning Department.  

FY2025 Expenditures

The vast majority of budget spending funds City employee salaries: teachers and school nurses, police officers, firefighters, and EMTS, public works employees and park maintenance crews, building inspectors and plans examiners, public health outreach teams, and staff across every department. Each year’s budget carries the investments made in previous years and strives to maintain and improve city services, even as inflation increases faster than the Prop 2½ limit. 

What will the City spend the 7% revenue growth on over the next year? 

Funding our workforce: $111M 

When I first took office, all of the 40+ multi-year collective bargaining agreements with City worker unions had expired—an unprecedented situation. We’ve since settled all these contracts with operational reforms to serve our constituents and cost of living increases to help City workers support their families with the rising cost of housing and groceries. The most recent round of collective bargaining included an innovative wage pattern that delivered bigger salary adjustments to our lowest-wage earners, which also helps recruit and retain talent when many public sector agencies face severe staffing shortages for critical services. We also negotiated critical public safety reforms with our police unions that set new national standards for accountability. These increases invest in our workforce, the most important foundation for delivering excellent City services.

Our schools and school communities: $87M

City tax revenues help fill the gap between state aid for public education and the needs of our school communities at a challenging time for young people. In FY25, the Boston Public Schools budget is growing by $45 million of rising operational costs for transportation, facilities maintenance, and food services, as well as the shifting of Universal Pre-K and salary expenses to the City budget as federal pandemic relief dollars expire. $36M of strategic investments target key focus areas of improving special education and inclusion, expanding supports for the highest need students, and advancing a district-wide focus on academics and literacy through instructional coaching and improved curriculum and materials. Meanwhile, the City’s charter school tuition assessment will increase by $6.2M due to higher per-pupil tuition rates required by the state.

Fiscal discipline for long-term financial stability: $60M 

Our city government’s triple-A credit rating reflects long-term financial stability and ensures the best rates to fund our capital projects. To preserve our long-term financial health and bond rating, we set aside funding each year to maintain a schedule for fully funding our pension liability by 2027 and fully meeting our debt service obligations.

Growing state assessments & insurance: $21M 

Inflationary pressures relating to labor, supplies and equipment, and contractual services drive up the costs of maintaining City services. Health, dental, and life insurance costs for current employees and retirees is growing by $11.7M, or 5.2%. State assessments, including for the MBTA, are nearly $3M of budget growth.

Targeted new city services investments: $23M 

With an overall budget focused on maintaining fiscal discipline, just 0.5% of the total budget is non-discretionary new spending, and we directed those dollars to important infrastructure for city services. This includes boosting EMS staffing by 12 EMTs ($7.3M) for an additional ambulance crew to keep response times down with growing emergency call volume; making necessary personnel and facilities improvements for basic city services ($5.3M), including dedicated staffing for Franklin Park; overhauling technology platforms that support City hiring, and modernizing permitting systems and other constituent-facing platforms like 311 ($3.5M); and funding housing in our most impactful programs for affordability and housing stability ($3M).

Residential Property Tax Relief Proposal

State tax law strictly defines how municipalities can collect tax revenues. As mentioned above, Prop 2½ puts a tight belt around property tax increases at 2.5% for everything except new growth. Boston can differentiate by setting a commercial property tax rate and a separate residential property tax rate, but we can’t create more specific distinctions for subcategories of different rates. And without state approval, the ratio between the commercial and residential rates can’t be more than 175%.

Over many years, even as the specific tax rates have varied year to year, Boston has maintained a stable and consistent split of tax revenues: commercial properties contribute 60% of the total, and residential properties contribute 40%. When property values grow or decline comparably for both sectors, this split is naturally maintained. But if one sector’s valuations go up while the other goes down, then the balance is disrupted. 

This year will be the first year that we will see the impacts of the pandemic on our valuations, and there are signs that commercial valuations may decline. As a result—if nothing changes—residential property owners could see a big increase in their property taxes this year.

Cities around the country are struggling with remote work trends leading to emptier downtowns with less foot traffic. Across nearly every dimension, Boston’s recovery continues to be steady and strong, and we are the safest major city in the country. But in the short term, we must protect against shocks to our tax system.

Under Prop 2½, declining commercial property values would not change the total amount of tax revenue collected, but the balance would be off. Current estimates are that residential property taxes could go up by 33% between the last quarterly tax bill of 2024 and the first bill of 2025. 

Commercial taxes still go down

Our proposal would give the City the ability to soften that blow by temporarily shifting the proportion of property taxes that commercial property owners would be responsible for—to maintain the 60% / 40% stable ratio. Just as when this same legislative language was approved and successfully used to avoid a similar tax shock in 2004, total commercial taxes collected would still go down and residential taxes would still increase, but not by nearly as much. And we’d avoid what would otherwise be a devastatingly large spike to residential taxpayers already struggling in a challenging financial environment. 

Some continue to misleadingly describe this proposal as a “commercial tax hike” because we would increase the ratio between commercial and residential tax rates, but that disguises the reality for tenants with triple-net leases in these buildings with declining property values. Not only are rents likely to come down if property values are declining significantly, but so will the taxes that get passed through to tenants. In other words, under this proposal, in commercial buildings with declining property values, businesses will PAY LESS in taxes next year while the City overall can avoid a 33% residential tax spike. It’s not as stark a drop in commercial taxes for a temporary period, but the proposal requires a step down over five years to eventually deliver the full drop for commercial taxpayers in a more predictable and balanced way.

Businesses rely on city services and a stable workforce

Some have pushed the City to cut back our budget or spend down our reserves instead of adjusting the ratio between commercial and residential rates. But these are not realistic or responsible alternatives.

In the 40 years since Prop 2½ passed, Boston has never asked voters to override that 2.5% limit. And the City has also never taken less than the full 2.5%. That predictability has played a critical role in maintaining our overall fiscal health—it’s a big reason why Boston has earned that triple-A bond rating (the best rating possible) every year for the last decade. It’s also necessary to have a chance to close the gap from inflation that has far outpaced a rate of 2.5% annually over several decades.

The scale of cuts necessary to counterbalance the budget instead of this proposal would be in the hundreds of millions of dollars. That could only come from widespread cuts to personnel, which would seriously undermine our ability to deliver excellent city services—and harm both residents and businesses that rely on them. Boston’s economic recovery has been grounded in outpacing every other city on public safety, including dedicating resources to addressing homelessness and the opiate crisis, beautifying and updating parks and playgrounds, and creating programming to heal and rebuild community after the pandemic.

Spending down our rainy day fund is not fiscally responsible when Boston is not in a recession or depression—the city has extremely low unemployment (far below the national and even statewide average), and hotel occupancy, tourism to the city, and job growth are at higher levels than pre-pandemic. Nationally, these economic indicators are also strong and do not show signs of impending recession.

We know the commercial sector needs every possible bit of support. We are working proactively to fill commercial vacancies through new business recruitment and incentives for residential conversion, encouraging in-person activities, and revitalizing spaces that need more foot traffic. 

It’s also worth noting that commercial tax rates have also been at a historic low in Boston, far below what commercial properties were taxed at 20 years ago or even 10 years ago.

Boston’s commercial and residential tax rates (in $ per $1000 of value) over time

Many businesses understand that even with the challenges they are facing, their economic prospects would be harmed if their workforce, including many Boston residents, faced an unaffordable, sudden spike in housing costs. We need both our businesses and our neighborhoods to thrive.

Many have mischaracterized the tax relief proposal as placing the full burden of maintaining city services on commercial properties, but this gets it backwards. Without a modest, temporary shift, as proposed, the full burden of falling commercial values will fall on Boston residents. To maintain excellent city services while adjusting to the new post-pandemic reality, we must preserve the balance for everyone having skin in the game — residential and commercial owners. The Massachusetts Municipal Association, which represents 350 cities across the Commonwealth, fully supports our proposal.

The full force of our City budget goes to strengthen opportunities for our residents and our businesses in Boston. And our businesses need Boston to be safe, beautiful, and affordable for their employees and customers. This proposal would reduce the decrease in commercial taxes so that businesses are still paying less, but we can prevent a dramatic increase in residential taxes, maintaining the stable balance that has guided our continued growth and vitality.

If you still want to know more about the budget for this next fiscal year, check out the full details here. And thanks for being a part of the conversation.