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Proposition 2 ½

Proposition 2½ (Mass. Gen. Laws Ch. 59 § 21C[1]) is a Massachusetts statute which limits property tax increases by Massachusetts municipalities. It was passed as a state law in 1980 and went into effect in 1982. The effort to enact the proposition was led by the anti-tax group Citizens for Limited Taxation.[3] The name of the initiative refers to the 2.5% annual limit on the overall increase in taxes that a municipality is permitted, but does not limit the increase of an individual bill. It is similar to other tax revolt measures passed around the same time in other parts of the United States.

Proposition 2 1/2 explained video

Real and Personal Property Taxes

Under Proposition 2½, a municipality is subject to two property tax limits:

  1. Ceiling: The total annual property tax revenue raised by a municipality shall not exceed 2.5% of the assessed value of all taxable property contained in it.
  2. Increase limit: The annual increase of property tax cannot exceed 2.5%, plus the amount attributable to taxes that are from new real property.

These limits refer to the entire amount of the annual tax levy raised by a municipality. The property taxes are the sum of: (a) residential real property; (b) commercial real property; (c) industrial real property; and (d) business-owned personal property. In practice, it may limit the tax bills of individual taxpayers, but only as an indirect result.

A side effect of Proposition 2½ is that municipality income will decline in real terms whenever inflation rises above 2.5%. Historically inflation has been above 2.5% for a significant majority of the years since 1980, thus resulting in a real decline in local tax rates and local spending ability.

Exclusions

Proposition 2½ excludes four cases from the tax levy increase:

  • "New growth": The Act allows for new growth. So, for example, when a new house is built, the tax levy may increase by the amount of taxes collected from that new construction.

And three types of exclusions may be granted by the majority those voting in a in municipal referendum:

  • "Capital exclusion": Capital expenditure for the upcoming fiscal year;
  • "Debt exclusion": For pre-1980 municipal debt or new debt issued for a designated purpose (e.g. bonds issued for a multi-year capital expense); or
  • Water/sewer debt: For certain water and sewer system debt.

Overrides and Underrides

Municipalities may exceed or reduce the limits with the prior approval of the majority those voting in a municipal referendum to:

  • Operational override: Override the levy increase limit.
  • Underride: The levy limit is reduced. Such a vote can be started by the Massachusetts initiative petition procedure, or the municipal legislature.

Motor Vehicle Excise Tax

The excise tax for automobiles registered in Massachusetts was also lowered by Proposition 2½. Previously, this tax was levied at a rate of $66.00 per $1,000 of car valuation (6.6%). Proposition 2½ lowered this rate to $25.00 per $1,000 of car valuation, resulting in a 2½ per cent excise tax rate,[4] but can still increase to the previous 6.6% tax rate if a Proposition 2½ operational override (see below) is approved by ballot in a community during a general election. The vehicle value is determined by the Massachusetts Registry of Motor Vehicles, using the manufacturer’s suggested retail price for the vehicle as a base figure and applying a set formula of depreciation in value according to the vehicle’s age. The value is lowest after 5 years, and stays at that figure for the future, regardless of the vehicle’s age or condition.

References