Special Briefing on Work from Home: What it Means for State and Local Economies and Revenues

The shift to working from home, accelerated by the COVID-19 pandemic, poses a fiscal threat to the nation’s biggest cities, which depend on commercial property taxes for revenue, according to panelists at the March 17 Special Briefing hosted by The Volcker Alliance and Penn IUR.

Panelists detailed research on the rise of at-home employment and its implications for budgets, real estate markets, and transit systems. The experts said big cities that were hardest hit by the pandemic and the desertion of downtown office space may need to raise taxes on residential property and retail sales to make up for lost commercial property revenue.

“We’re in for some heavy lifting, politically,” said Anthony Williams, mayor of Washington, DC from 1999-2007 and current chief executive officer of the Federal City Council, a nonprofit organization of business and professional leaders.

Moderated by William Glasgall, Volcker Alliance senior director, public finance ,and Penn IUR Fellow, and Susan Wachter, co-director of Penn IUR and Wharton School professor of real estate and finance, the briefing was the twenty-ninth in a series of sixty-minute online conversations featuring experts from the Alliance's national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. In addition to Williams, panelists included Jose Maria Barrero, assistant professor of finance at Instituto Tecnológico Autónomo de México; Howard Chernick, professor emeritus, Department of Economics, Hunter College and the Graduate Center, City University of New York; and Ally Schweitzer, reporter for Washington public radio station WAMU and DCist.

“The pandemic acted like a mass experiment,” said Barrero, who helps conduct a monthly work-from-home survey. “The forced experiment that the pandemic imposed on us has taught us how well it works,” he said.  “Employees and their companies have learned that work from home can work and that trying to get back to full time is something that we don’t need.”

Barrero said his latest survey, in February, suggested that knowledge workers are shifting to a hybrid mode in which they will work from home a little over two days a week instead of at home full time. That’s up from 5 percent of all paid working days being done at home before the pandemic.

The fiscal impact of this shift will be greatest for big cities that were hardest hit by COVID-19 and where finance, information, professional and technical, and management sectors are most important to the economy, Chernick said. In New York, for example, 61 percent of all employment, weighted by wages, comes from these sectors, in which working at home is most feasible.

“A hit to the demand for commercial and industrial real estate will lower the value of these assets,” he said. “And that part of the property tax base is very important.” Atlanta, where commercial and industrial makes up 56 percent of the property tax base, may sustain the hardest revenue hit among eight cities that Chernick studied.

In Washington, property tax assessments on large office buildings declined about 10 percent in 2021 from before the pandemic, “so we’re looking very much at budget impacts,” said Schweitzer, who has reported on the impact of the work-at-home phenomenon on federal employees in the nation’s capital. She added that commuter spending while downtown generates as much $100 million a year in sales tax revenue for the city.

In response to the work-at home trend, she said, Washington is looking for ways to make it easier for office building owners to convert downtown properties to residential use, and local business improvement districts are studying ways to transform the downtown into more of a “place where you want to hang out – an entertainment hub.”

Chernick said that a 9 percent increase in the valuation of residential property would be enough to offset a projected decline in commercial property taxes. “The political problem,” he said, “is how do you tax that?” For example, New York City has had a property tax system that deliberately shifts the burden away from homeowners, he said, and many cities have limits on property taxes and levy increases.

“In most cities a 9 percent increase in property tax revenues is not going to happen right away,” Chernick said. “This is going to be a very vigorous political debate over who bears the cost.”