Property Tax Limitations and Local Fiscal Conditions

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. The recent economic downturn has resulted in difficult times for local governments which are faced with reducing expenditures (e.g. teacher layoffs) or passing overrides to increase revenues. 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 decisions and local fiscal conditions. 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 conditions. Unfortunately, poor towns are the ones that tend to be in bad fiscal condition but are less likely to pass overrides. Given that state aid cuts will disproportionally affect these poorer towns means that they are in for some tough times financially.