Property tax limits, local fiscal behavior, and property values: evidence from Massachusetts under Proposition [formula omitted

Abstract

This paper examines the impact of a specific property tax limit, Proposition 2 1 2 in Massachusetts, on the fiscal behavior of cities and towns in Massachusetts and the capitalization of that behavior into property values. Proposition 2 1 2 places a cap on the effective property tax rate at 2.5% and limits nominal annual growth in property tax revenues to 2.5%, unless residents pass a referendum allowing a greater increase. The study analyzes the 1990–1994 period, a time when Massachusetts municipalities faced significant fiscal stress because of a 30% cut in real state aid and a demographically driven increase in school enrollments. The findings include the following: (1) Proposition 2 1 2 significantly constrained local spending in some communities, with most of its impact on school spending; (2) constrained communities realized gains in property values to the degree that they were able to increase school spending despite the limitation; and (3) changes in non-school spending had little impact on property values.