Threat of “Dramatic” Tax Bill Increases Exaggerated
The Cambridge City Manager’s June 2018 warning of dramatic tax bill increases if Cambridge were to switch to housing development as a focus seem completely exaggerated. While the basis for the claim is real — arcane property tax rate requirements under the Massachusetts classification laws put limits on Cambridge’s ability to shift costs towards commercial properties over residential — the reality behind that threat seems non-existent in the actual market in which Cambridge finds itself either in June of 2018 or now.
Back in June of 2018, the City Manager warned that focusing on housing development in the city could cause residents to see “dramatically” higher tax bills. (This was reported on by the Cambridge Day at the time.)
Looking into this, I have learned that MA’s property tax limits are involved and complex! The City Manager’s comment in the article that this is a confusing area was not inaccurate. Thinking through how this worked was hours of playing with a spreadsheet, and I will grant I may have made a mistake somewhere along the way, but I feel pretty confident that the City Manager’s prediction is much more dire than it seems.
The first thing I learned is that unlike some other towns, Cambridge is effectively not limited by the “Prop 2.5” ballot petition passed in 1980. Due to the increase in “real property” values, Cambridge’s $409M 2019 tax levy is significantly less than its ~$600M FY2019 Levy limit under Prop 2.5. This is one limit that Cambridge is likely not at risk of running into any time soon.
Cambridge also has a favorable rate on residential vs. commercial properties: the stated rate is $13.71 per thousand for commercial, compared to $5.94 per thousand for residential. The residential rate is further affected by an exemption of 30% of average parcel price, exempting up to $375,800 of assesed value.
(As an unrelated aside: the residential exemption is ‘paid for’ by raising the overall rate of residential taxes. For most folks claiming the residential exemption, this is a win, but for some, it is not: In FY2019, the break-even assessed value is approximately $1,975,500.)
But what controls how favorable residential taxes are compared to commercial? Can the city just make residential taxes zero, and charge everything to commercial property holders? Not under MA law! (SimCity’s single property tax rate never taught me this!)
Instead, there are limits in two dimensions that prevent a highly imbalanced tax distribution. First, the residential levy must pay at least 34.5% of the total levy (in Cambridge), and commercial properties can’t be taxed more than 175% of what it would be if both were taxed equally.
What this means is that in order to keep the current distribution of residential vs. commercial properties, the city is motivated in two dimensions: up to a point, increasing relative residential property values will allow the city to lower the residential tax burden per dollar. However, beyond that point, the 1.75x ratio of the commercial burden will require shrinking the relative difference between the commercial and residential property taxes — you can’t give as much of a discount, because you make commercial properties pay “too much”.
In 2018, the City Manager and the Assessor said there was a potential for “a huge impact” from this. In 2018, this was likely seen as a concern for two reasons: Cambridge’s commercial burden ratio was reported at 171% (out of the 175% cap), and the Envision Cambridge plan was heavily focused on housing priorities and potential densification options across the city..
However, in the FY2019 letter the City Manager sent just 4 months later, new commercial property value — created by the continued building of commercial property across the city — lowered that number to 163%.
So, my question was: as of the FY2019/October 2018 numbers, how much housing would it take to run into the 175% limit? How much housing could we build before we would actually have the problem described by the City Manager?
In FY2019, there was $29.4B of assessed residential value citywide, compared to $18.0B of Commercial. Assuming we held commercial development steady, and you continued to tax residential property at the same rate, you would need to build an additional $8.5B of residential property in Cambridge before you would hit the cap.
If you wanted to hold the overall tax levy steady at $409M, development of this type — adding $8.5B in additional residential valuation — would allow you to lower rates across the board by 10%, leaving residential at around $5.36/1000, continuing the annual trend of reductions in tax rate, keeping total tax bills steady.
What does $8.5B in additional assessed residential property mean in Cambridge? Typical assessed value per condo unit is $583k; while single units in 2 and 3 family homes are $540k and $411k, respectively. (Here’s an example of a nice three family near the median.)
There are 121 apartment buildings in Cambridge with more than 20 units, which have a median assessed value per unit of $350k. (Some of these are quite lovely, like this one, which has an average value per unit right at the median of $349k.)
What this means is that in October of 2018, Cambridge could add somewhere between 14,000 and 24,300 units of housing (ranging from two family homes to apartment buildings) before needing to adjust the ratio of commercial tax rates to residential!
In addition, Cambridge’s focus — both then and now — has included a heavy focus on deed-restricted affordable housing units. Because deed-restricted units are limited on what price they can be sold at, their assessment is also correspondingly lower: Most deed-restricted affordable units cap out at more like $200k/unit, meaning that the $8.5B in additional housing assessments would correspond to 42,000 affordable housing units — nearly as many housing units as Cambridge has city wide.
I can say with certainty that the final Envision plan shows nothing like these plans. Instead, the plan passes along the idea of on the idea of having only 12,500 new units — many of which are already permitted — in place for the next 12 years. There is simply no plan from the City to move forward on anything like this level of development.
And again: this is only if we keep all commercial development on hold! With increased commercial property tax assessments — which have been going up 50% faster than residential assessments for several years running — these limits are even less likely to come into play.
Now, so far this has been focused on “rates” and not “bills”. The City Manager’s dire-seeming warning was about the room to continue to keep tax bills steady. With property values in Cambridge continuing to go up at in impressive clip, holding rates steady is something that risks propertyholders seeing increases in the absolute number of dollars paid.
Currently, Cambridge has been able to cut property tax rates every year since 2013. The result of this is that for several years running, more than 75% of residential parcels see a tax bill increase of < $250/year, despite property values that have, in many cases, doubled since 2013.
No one likes to see an increased tax bill. However, I think that the level to which Cambridge is trying to keep property taxes flat despite massively rising property values is harmful in the long run to the city. By under-taxing property relative to our neighbors, there is a decreased motivation to put property in Cambridge to effective use — whether it be as a home, as a rental property, as a storefront or as a commercial property. When holding onto something is a tiny cost relative to the overall growth in the market, artificially low taxes relative to property values can incentivize bad behavior.
Beyond that, there’s also the fact that one of the reasons for property taxes in Cambridge rising so aggressively is the lack of expansion of residential stock in Cambridge. That is, residential property values are inflating specifically because we are increasing demand to be in the city — with greatly increased development of office spaces, institutional space, and research labs — while growing the number of available units at a lower rate. One of the ways to lower the rate of property tax increases is to lower the aggressive increase in property values. With a significant growth in residential units, residential value growth per property would likely slow.
As a renter in the city — like 63% of my fellow Cantabridgians — my typical increased cost per year does not line up in any way with these low property tax increases. Instead, I have seen increases of close to $1000/year for every year I have lived in Cambridge for a family of four. The sub-market value property tax increases clearly help protect property owners — but with nearly 2/3rds of Cambridge renting, this value is experienced only by a minority of our neighbors.
In the end, all of this may depend on your perspective, but one thing feels certain to me: despite the City Manager’s assurances that he did not “in any way, want to scare people,” his claim that residential tax bills would increase “dramatically” seems difficult to square with reality. Commercial property in Cambridge has increased in value at a rate 50% higher than residential since 2017, and with more than 2.5M of already permitted office/commercial developments in play, this trend is unlikely to end any time soon. While that trend continues, the City Manager’s dire-sounding warning feels completely at odds with the state limitations on the City’s assessment process.
So, I’ll phrase what the City Manager seemed to mean in a different way, that I think is more accurate:
If Cambridge were to put a complete stop on all new commercial development, and at the same time were added 15,000 new housing units to the City, under current market conditions, your annual tax bill might start rising at the same rate that property values are rising.
If I look at that statement it certainly feels a lot less scary than “If we build more housing, your tax bills may go up dramatically.” But from a City Manager focused on austerity, maybe that was the point.