Property tax limitations and local fiscal conditions: The impact of Proposition 2½ in Massachusetts

Abstract

In Massachusetts, Proposition 2½ limits local property taxes to 2.5% of assessed value (the “levy ceiling”) and restricts the current limit on property tax revenue (the “levy limit”) to an annual growth rate of 2.5%. Town residents can vote to override the 2.5% increase in the levy limit, but not if it exceeds the 2.5% levy ceiling. An override results in a permanent increase in the city or town's levy limit. We look at the role that Proposition 2½ has played in the fiscal conditions of towns in Massachusetts. To do so, we develop a model of Proposition 2½ override activity and local fiscal condition. We estimate the model using panel data on Proposition 2½ override attempts since the mid-1980's as well as other town-level socioeconomic and fiscal information. Using a fixed effects estimator, we find that passing a reasonably sized override can significantly strengthen local fiscal condition, both in the short-run and long-run. Further, previous override attempts increase the likelihood of current override activity. The recent economic downturn has resulted in difficult times for local governments. Cuts in state aid have a disproportionate impact on poorer towns. These towns have been less able to attempt and to pass overrides and hence they have not been able to reap the benefits that this has for their fiscal condition. They are faced with reducing expenditures (e.g. teacher layoffs) or passing overrides to increase revenues. We find that worsening fiscal conditions lead to more overrides so we expect to see more override activity in the near future.