Report on the Potential Impacts of Property Tax Abatement on Rental Housing Construction in Boston 
Due to rising interest rates and building costs, construction of residential buildings in Boston has sputtered. As of July 25, 2023, 199 projects comprising a total of nearly 23,000 housing units had been approved by the Boston Planning and Development Agency Board but were not yet under construction. This report assesses the extent to which different property tax abatement options could result in approved projects moving to construction.
Key Findings
- The key cost to the City of Boston of a tax abatement subsidy is the effective tax cost per new unit created by the subsidy. This cost includes not just the tax subsidy for that additional unit but also the tax cost of subsidizing units that would have been built absent the subsidy but nonetheless receive that subsidy.
- The present value effective cost per new unit created is more than $167,000 for each policy and scenario that we consider; some policies cost more than $400,000 per unit. These costs partially reflect an inability to target tax relief so that it benefits only incremental construction.
- The most cost-effective policies abate residential property taxes up to a cap (we consider $2,500 and $5,000) rather than fully abating those taxes. Without the cap, luxury buildings that pay the highest property taxes would receive large subsidies per new unit built. A cap on the size of the tax abatement reduces the subsidy to luxury buildings, which shrinks the overall cost of the policy more than it reduces the additional units produced. Uncapped subsidies are significantly more expensive.
- The present value effective tax cost per new unit ranges from $206,000 to $293,000 for a 15-year subsidy capped at $5,000 and from $238,000 to $345,000 for a 29-year subsidy capped at $5,000. The 29-year subsidy produces more units.
- Smaller subsidies are not necessarily more cost effective. Although they cost less per unit built, they produce fewer additional units. Consequently, the subsidy is given to many units that would have been built absent the tax break, which means there is more subsidy “waste” as well.
- Even the most generous policies we consider will create only about 1,800 new units under the most optimistic scenarios. More cost-effective policies will likely create fewer than 1,100 additional units. These policies will not unfreeze the backlog of approved projects or fix Boston’s long-term housing problem.
- There is significant uncertainty about the impact and cost of policies. Predicting how many approved projects will begin construction without a policy change is challenging; therefore, it is difficult to estimate the number of units on which the City of Boston will “waste” a subsidy.
- One potential concern for city leaders to weigh is that a tax subsidy, even if justified by today’s unusual circumstances, could become permanent and that the tax losses would then limit the City of Boston’s ability to address other, non-housing-related problems. Such a tax subsidy could also blunt a desire to address the more fundamental problems facing residential building in Boston. This downside risk could be reduced by strictly limiting the duration of subsidies, the number of units subsidized, or both.
- Long-term high construction costs could prevent tax subsidies from producing enough housing with low enough rents to significantly reduce Boston’s housing costs.
Implications
If a temporary need to quickly deliver new units justifies a subsidy, then it is logical for any subsidy to be temporary and for its size to be based on the number of housing units created, not on the value of units in the project. Moreover, because a subsidy can be justified in theory does not imply that any subsidy program is justifiable. A specific subsidy policy makes sense only if its benefits exceed its costs. Consequently, the primary purpose of this report is to analyze the effective cost per new unit built of different possible tax abatement programs. This report’s authors feel confident in assessing these costs, but they stress that only Boston’s leaders have the standing to decide how much they are willing to pay, in terms of foregone taxes, to produce more housing quickly. This report provides those leaders with estimates of the number of additional units gained and the cost of providing those units through different subsidy policies. These costs must be weighed against the social value that the City of Boston places on the immediate production of additional housing.
Abstract
Boston’s high housing costs reflect a historic failure to build enough units to satisfy demand. Interest rates and construction costs have risen recently, and the flow of new market-rate residential housing projects has slowed. To spur more construction, the City of Boston is considering various policy options. Our committee was asked by Boston Mayor Michelle Wu to assess the market impacts of one of these options: real estate tax abatements. This report presents our analysis of the likely effects on the number of units constructed and the costs to taxpayers of various tax abatement alternatives. We do not recommend which policy, if any, the city should pursue; Boston officials are better positioned to assess whether the benefits of these policies warrant the costs to taxpayers.