Hidden Link

January 11, 2024

By JENNIFER SMITH 

Despite developer optimism and stakeholder expectation that Boston Mayor Michelle Wu could roll out a new housing tax abatement policy at the 2024 State of the City speech – no dice. 

An analysis of potential housing subsidies submitted to the city on Wednesday said a policy eliminating or reducing taxes on new development was anything but a silver bullet, especially with interest rates and supply and labor shortages grinding housing production to a crawl.

In 2023, the mayor and her planning chief, Arthur Jemison, said the city was hard at work on assessing a possible time-limited tax incentive program to push some of the thousands of units approved but not constructed into motion. But Wu told reporters after the State of the City that Boston cannot support the housing tax break at the moment.

“We have spent a tremendous amount of time and energy really engaging with the real estate community, with academics, with just about every source of data, to understand the financials and what it would take to get our pipeline going,” Wu told reporters. “The scale of resources that it would take to close the gaps, to make these projects actually move forward — and at scale, to start to bring rents down — is simply not something that the city could afford.”

Wu’s remarks came a day before a team of researchers – led by Harvard economics department chair and Wu’s former professor Edward Glaeser and Harvard economics department associate Denise DiPasquale – delivered a 48-page analysis of potential subsidy programs that would last 15 or 29 years. At Wu’s request, the researchers evaluated two possible subsidy frameworks – one with no per-unit subsidy cap that offers a complete or 75 percent property tax abatement for new residential projects, and one capped at either $2,500 or $5,000 per unit per year.

Wu said Boston has more than 23,000 approved housing units in the pipeline, around 7,800 of which are market-rate apartments that could use a targeted tax abatement. 

With the interest rate environment as it is, “eliminating taxes on new market-rate rental property entirely will generate at best 1,800 marginal new units in an optimistic scenario,” the report’s authors predicted, referring to units that would not be built without such a subsidy. More “moderate” interventions, like tax subsidies capped at a few thousand dollars per unit, would likely produce fewer than 1,100 marginal units. 

“The impact of these policies will grow if future interest rates fall. But if interest rates do drop, it is also likely that more projects would begin construction without any subsidy,” according to the report. “Our analysis indicates that a residential tax abatement will not induce developers to fully unfreeze the pipeline of approved projects.”

The subsidies would be less effective in producing units if the amount of tax abatement were capped at $2,500 or $5,000 a unit, the researchers note. Uncapped abatements would offer developers of market-rate and luxury units that pay the largest amount of property tax larger subsidies.

Another hurdle also presented itself – the risk to Boston’s property tax base, far and away its most substantial source of revenue. Wu’s administration will have to do some hard math, the report’s authors wrote, in considering whether getting movement on the construction backlog is worth the cost to its tax stream.

“Boston’s construction industry is in a difficult position, but improving the situation with a significant tax subsidy makes sense only if the mayor thinks it is wise to reduce future tax revenues by roughly $250,000 to produce an extra unit,” according to the report. 

“The fundamental policy question,” the report authors wrote, “is whether the city values affordable and market-rate housing units enough to justify the tax subsidies.”

Despite the high cost, a short-term push for more residential housing in Boston through subsidies could be justified if it appropriately bridges the gap between “social benefit and private benefit,” but if that math tilts too far toward private benefits, the researchers recommend considering other ways to help lower-income people find and afford housing, like direct cash transfers. 

But there’s little argument about the tax abatement’s relative effectiveness, if the city were willing to part with hundreds of millions of dollars in tax revenue.

“There are few alternatives to a tax subsidy that will induce the projects that have already been approved to move forward,” they wrote. “The city of Boston could waive the building permit fee or make the fee due on occupancy rather than at the onset of construction; either of these actions would be appreciated by builders, especially smaller builders, but they would be small and largely symbolic.”

What the researchers describe as a “more meaningful change” happens to align with Wu’s current approach: just retool the system. That could mean reshaping its permitting process to allow a larger number of “as of right” units. Wu proposed changing zoning to allow construction of additional dwelling units, or ADUs, across the city in her speech.

Ultimately, these changes could have substantial impacts over the next decade, the researchers said, but would do little to clear the current approval backlog. Interest rates remain the 800-pound gorilla in the room.

“We’ve gotten a pretty good idea of what it will take to really spark this next set of projects to move forward,” Wu told reporters after her speech. “We’re not there yet, with where the gap is, but we’ll keep watching it.”