Boston Foundation report details tax-policy disadvantage for Massachusetts communities

Boston –An outdated legal system ties the hands of Boston and other communities with regard to tax revenue strategies and puts Massachusetts at a competitive disadvantage compared to other parts of the country—a burden many predict will only grow heavier as the nation’s recession continues to deepen.

That is the chief finding of a report released today by the Boston Foundation and developed with research provided by the Boston Municipal Research Bureau. The report uses the economic impact of the 2007 World Series to underscore how a lack of fiscal autonomy cheats local communities out of potential income.

Research conducted for the report revealed that while Boston took the series, Denver won a decisive victory when it came to benefiting from the competition.

After calculating tax receipts, reimbursements and expenses, the City of Denver gained $940,365 as hosts of the 2007 Major League Baseball playoffs, while the City of Boston ended up out of pocket $649,084—a differential of more than $1.5 million. That despite the fact that the total amount of taxes generated in the two venues was virtually identical: $1.492 million in Denver and $1.453 million in Boston. The difference in benefits reflected who, exactly, is in control of revenue raised. In Denver, collections were enlarged by local hotel, sales and meals taxes, 63 percent of which went directly to the city. In Boston, sales and meals taxes flowed to the state, as did the bulk of the hotel tax.

"We may have won the World Series, but it was a grand slam for Denver's economy compared to Boston's,” said Boston Mayor Thomas M. Menino. “This report articulates a disparity that we have known about for too long. Under the state's system of home rule, Boston simply does not have the ability that it needs to compete fully and enjoy the same economic opportunities of other major cities. Diversifying municipal revenues will provide greater stability, helping to minimize our over-dependence on property taxes. I hope that our legislative leaders will act to give the City of Boston a chance to win."

The report builds on an in-depth study released in 2007 by the Boston Foundation in conjunction with the Rappaport Institute for Greater Boston, titled Boston Bound: A Comparison of Boston’s Legal Powers with Those of Six Other Major American Cities . That report was written by David Barron and Gerald Frug , Harvard Law School professors and nationally recognized experts in local government. It documents Boston’s competitive disadvantage in terms of its freedom to design a comprehensive tax strategy, when compared to New York City, Chicago, San Francisco, Atlanta, Denver and Seattle.

Today’s report is the first in a series of occasional reports highlighting key findings and recommendations drawn from Boston Bound that have gained relevance in the ongoing economic crisis. Today’s release and the full report of Boston Bound are both available at the Boston Foundation website, at www.tbf.org .

“As the economy weakens, it only becomes more urgent for civic managers to have the greatest possible flexibility to serve the broad needs of the community without unduly relying on any single revenue source,” said Paul S. Grogan, President and CEO of the Boston Foundation. “One reason Boston property taxes are so onerous is that the city has few other options.”

Boston Bound discovered that competitor cities such as Chicago are developing innovative development strategies because they have the freedom to pursue any politically viable tax plan that is not expressly forbidden by state law. In Massachusetts, the reverse is true: localities are barred from developing any strategy that is not expressly given to them. One result of this arrangement is that state government in the Commonwealth spends a significant amount of its time on local matters better managed by the authorities who hold direct responsibility and oversight.

The current arrangement affects communities in addition to Boston. The State Legislature’s control of local liquor licenses, for example, has led to delays in a major economic development project in the suburban town of Westwood. But as the fourth largest economy in the country and the economic engine for Massachusetts, the focus on the report is on Boston and the impact of a set of rules that shifted fiscal power to the Statehouse generations ago.

One legacy of that shift documented in the report is the excessive reliance on real estate taxes it has forced on Boston. Records show that in 2003 fully 58 percent of total revenues for Boston are derived from property tax, compared to 25 percent in New York, 12 percent in Chicago and 10 percent in Denver. Boston has half the different kinds of taxes than comparative cities, which further contributes to this imbalance.

As earlier research conducted by Frug and Barron has indicated, this situation is not unique to Boston, but affects communities across the commonwealth. They argue that in light of increased global competition and the ability of enterprise to move to find more attractive conditions, this legal anomaly can only impede Boston—and Massachusetts’—ability to innovate at meet the challenges of a changing economic climate.

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The Boston Foundation, Greater Boston’s community foundation, is one of the oldest and largest community foundations in the nation. In Fiscal Year 2008, the Foundation and its donors made close to $79 million in grants to nonprofit organizations and received gifts of $113 million, bringing its assets to $838 million. The Foundation is made up of some 900 separate charitable funds established by donors either for the general benefit of the community or for special purposes. The Boston Foundation also serves as a major civic leader, provider of information, convener, and sponsor of special initiatives designed to address the community’s and region’s most pressing challenges. For more information about the Boston Foundation, visit www.tbf.org or call 617-338-1700.