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Meeting the Challenge: Examples of Boston's Fiscal and Economic Development Initiatives

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Ronald Rakow, Boston’s Commissioner of Assessing, argues that a heavy dependence on property tax revenues makes it essential for the city to be creative in both growing and preserving its property tax base.

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Meeting the Challenge: Examples of Boston's Fiscal and Economic Development Initiatives

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. PILOT Program Results $8.7
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. Personal Property Tax Revenue 0 2 4 6 8 10 12 14 16 18 20 2009 2010 2011 2012 2013 2014 2015 2016 Millions 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. Appeal Backlog has Disappeared 0 2 4 6 8 10 12 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Thousands Outstanding Appeals Virtuous Cycle Vicious Cycle
  20. 20. 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

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