City Budget: More Taxes and Serious Issues

The City Council is expected to approve the FY26 budget in June.  At this point, the budget is unlikely to change significantly; however, this year’s discussions have revealed serious considerations for next year’s budget.  As you vote for the new City Council in November, consider each candidate’s ability to tackle these issues and facilitate tough decisions with compassion.

Cambridge has benefited from a substantial subsidy from commercial taxes and fees, accounting for over 66% of our revenue, while also increasing the cumulative tax levy on residents by 25% over the last three years. As a result, we’ve committed to an outsized operating budget and unrealistic expectations. During the same period, office and lab vacancies in Cambridge have increased from 0% to 22% (link).  This trend will significantly decrease the commercial tax subsidy, shifting the burden to residents.  The City must face the situation and wean us from this unsustainable reality.  We’ll experience withdrawal pains, but we can control our destinies and priorities.  If we don’t, the state will dictate our fate.

The Assistant City Manager of Fiscal Affairs presented a memo at the May 5th Finance Committee meeting (here) on how two independent trends, lower commercial tax revenue, and a soaring city budget, that combined will appreciably increase our residential taxes, grow housing costs for owners and renters, and eliminate future budget flexibility.

The party is Over

Cambridge can no longer rely on Kendall Square office and lab tax revenues and fees to support annual operating expense increases of 8-10%. We’ve become accustomed to paying $1 in residential taxes and receiving a bonus of $2 from commercial properties, which has contributed to an artificially high expense structure. Market and economic forces are driving lower valuations and fees on commercial buildings, which will shift a larger burden to residential taxpayers. The 1+2 bonus works against us in this shift.  A 1% decline in commercial revenue results in a 2% increase in residential taxes, meaning we’ll pay substantially more to maintain the same level of city services. The City presented a scenario where the residential burden increased from 34% to 44.4% by 2029. We need to look at all spending through this lens.

Manage a Soaring City Budget

The City Manager’s budget proposes cutting operating expense increases from 8.1% in 2025 to less than 5% in the forward years by finding efficiencies in current operations. An overrun of $6.8 million in the FY26 budget will cause a one percent increase in the taxes property owners and tenants pay.  

To slow this growth, the memo recommends that the City Council set “priorities that may affect how we allocate the City’s budget across major areas, particularly if this represents a change in direction or emphasis.” “We would expect this would require deeper conversation and engagement with the community, for instance, if we were to explore a material change in our investments in parks and playground or street infrastructure.” 

Hitting this goal does not address potential double-digit tax increases caused by the loss of commercial revenue. 

Why do we care?  

Cambridge has one of the lowest tax rates in the state, but that status is at risk.  While some residents may be willing to pay more, others will find higher rents and property taxes burdensome. Spending growth should require strong justification.  There are several reasons.

Higher Tax Burden -  Commercial properties’ 66% share of tax revenue today will fall significantly over the coming years. Fundamental economic changes will shift the tax burden from commercial to residential properties and limit Cambridge’s ability to support growing operating budgets.  The causes of this shift are high vacancy rates that lower the taxable value of buildings and falling revenue from fees on new construction. The lab space vacancy rate Cambridge has grown from 0% to 22% in the last 3 years (link).

Reduced Services - The proposed budget assumes significantly smaller annual budget increases of less than 5% (compared with 8.1% in FY25). Combined with lower commercial tax revenue, the budget will limit new projects and require unpopular and challenging re-prioritization of current projects.  Exceeding this goal amplifies the ramifications discussed below.

Higher Housing Costs - Growing residential taxes increase the cost of housing for owners and renters.  The memo quantifies these increases for owner-occupied homes of various types, which have a $500,000 exemption.  “Tax levy increases in the past three years (FY23, FY24, and FY25) were 7.45%, 8.27% and 9.28% respectively, resulting in a cumulative property tax levy increase of 25%.” 

Rental properties do not get an exemption so that landlords will pass through higher taxes as increased rents. The plot shows how exceeding the operating budget growth goals can represent hundred dollars per month.

State Imposed Tax Constraints - Shrinking tax base growth and growing operation budgets diminish “Excess Capacity” that exempts Cambridge from Proposition 2½.  Without Excess Capacity, state law limits annual tax levy increases to 2.5%.  “The total impact would be the need to find $27 million in savings compared to the currently submitted budget.” Tax levy increases above 2.5% would require voters to approve an override.  The plot below, extracted from the memo, does not account for decreases in commercial growth, which would cause faster depletion. Getting our budget under control is essential.

Growing Debt Obligations - Cambridge has plans for numerous capital projects that require taking on hundreds of millions in debt, which will embed increased annual expenses that we must pay back. These obligations represent 10% of the operating budget and reduce funds for basic city services. Declining tax base growth makes budget increases difficult or even illegal with Proposition 2½. As debt service increases, borrowing more money becomes more expensive. Capital projects include roadwork, bike lanes, park renovations, and building renovations. 

Now what

The budget for FY26 is cooked and should get approved in June.  Looking forward, we need to take action.

• Elect a City Council that understands the critical situation.

• Carefully consider each expensive new initiative;  they create difficult obligations to cancel.

• Look for ways to reduce spending.  Salaries/benefits and debt service are difficult to decrease.  A hiring freeze might be wise. 

• Consider delaying or canceling capital projects that embed a burden on future operating budgets.

For more detail:  A memo presented by the City’s Assistant City Manager for Fiscal Affairs (here) at the May 6, 2025 Finance Committee meeting describes the potential increases in residential tax bills and potential limitations on the City’s ability to levy taxes over the next 5 years.  This analysis draws from that memo.