Op-Ed: Providence on the Brink

Unless it’s an immediate crisis, politicians often view systemic problems as an inconvenience that can be ignored until they’ve moved on and it’s become someone else’s problem. Unfortunately for first-term Mayor Brett Smiley, one of those systemic problems is coming to a head and it could be very troubling as it would affect every homeowner in the city.

Providence commercial property owners have long subsidized the residential owners with one of the highest tax rates in the US. Since COVID, however, remote working has given way to hybrid working, which has created excess office space. This has pushed vacancy rates up dramatically, and now it’s showing up in valuations. Notably, the bond rating agency downgraded Providence Place, which is expected to lose its major anchor, Macy’s (the mall has a tax agreement that goes through 2028, but a major revenue jump would appear highly unlikely). And we won’t even discuss the vacant Superman building!

A number of property owners are currently engaged in appeals, which could become lawsuits over commercial valuations; if they are successful, the city’s balanced budget could take a significant hit.

Commercial real estate makes up over 35 percent of the city tax revenue, and the Tangible Property Tax, which largely comes from commercial property tenants, accounts for another 18 percent of the revenue and is also expected to take a substantial hit.    

While there are hundreds of more units under construction or in planning stages, many of these projects have tax abatements or will take advantage of the 8 Law. This law, passed in 1995, allows developers to pay 8 percent of their annual rental income in lieu of paying the commercial rate, as long as the development is designated for low-income housing. Part of the controversy with this law is that it does not define how “affordable” the apartments have to be, nor does it explicitly say that all of the units in the building have to qualify in order to receive the more favorable tax treatment. That’s a huge problem.

On the positive side, the residential side of the tax base is very strong. Prices remain high and inventory, while up slightly, is still low. According to Zillow, Providence is the fifth hottest housing market in the US with average values up 12 percent this year following several years of in a row of double-digit increases. As it stands today, residential property taxes make up 44 percent of the city’s revenue.

Providence’s major revenue problem is that non-profits, which do not pay taxes, own close to 40 percent of the city’s taxable property. If the non-profits were properly taxed, Brown University, Johnson & Wales University, Providence College, Rhode Island School of Design, and the hospitals would contribute over $150 million annually.

Instead, the city receives around $34 million from the state through the PILOT (payment in lieu of taxes) program (about 27 percent of the difference), plus additional annual payments from the institutions, but nowhere near the lost value. The major non-profits have worked out deals that came with costs and favors, offsetting a portion of the actual hard dollars. But every additional dollar was a battle.

This is not just a local problem, and legislatures in other states are looking at creative ways to help their cities and towns. In Massachusetts the legislature is considering a bill that would let cities mandate PILOT payments equal to 25 percent of what they would otherwise pay in property taxes. Another bill would target an annual 2.5 percent excise tax on the endowment fund revenues to support public education.

We believe that the mayor must bring the Providence legislative delegation together sooner rather than later, and start examining viable solutions to what will become a crisis for taxpayers. While the annual tax increase is capped at 4 percent, the city still needs to have a balanced budget and the cuts could be draconian.

Bottom line, the non-profits need Providence and Providence needs the non-profits, but the costs need to have some degree of equity.

Op-eds express the authors’ opinions and do not necessarily reflect the views of Hey Rhody Media. Readers are welcome to send responses or letters to the editor to be considered for print publication in a future issue or posted online. Letters can be emailed to Abbie@heyrhody.com