Proposition 21⁄2 (M.G.L. Ch. 59 Sec. 21C), which was passed by Massachusetts voters in November of 1980, places a limit on the amount of property taxes a community can levy each year. Proposition 21⁄2 establishes two types of restrictions on the annual property tax levy. First, a community cannot levy in excess of 2.5 percent of the total full and fair cash value of all taxable real and personal property in the community. This limit is referred to as the levy ceiling. Second, a community’s levy is constrained in the amount it may increase from one year to the next. The maximum amount a community can levy in any given year is called the levy limit. The levy limit will always be below or at most equal to, the levy ceiling. It may not as a rule exceed the levy ceiling.
Under Proposition 21⁄2, a community’s levy limit increases each year by two factors: an automatic increase of 2.5 percent over the prior fiscal year and any increase in valuation that is not the result of property revaluation. This so-called new growth increase, which varies from year to year, recognizes that new development often results in additional municipal costs. For example, the construction of a new residential subdivision could cause an increase in school enrollment, public safety and other public service costs.
Proposition 21⁄2 does provide a community with the flexibility to levy more in taxes than would otherwise be permitted under its levy limit. However, with a few exceptions, these additions must be approved by a voter referendum. The law establishes two types of tax increases: overrides and exclusions. It also sets out the procedures a community must follow in pursuing one or both of these increases.
Communities have the option of passing an override to obtain additional funds for annual operating budgets and fixed costs, although they may be used to fund any municipal expense. An override increases the community’s levy limit for the fiscal year and becomes part of the base for calculating future years’ levy limits. The result is a permanent increase in the amount of property taxes a community may levy. The override may be for any amount, so long as the new levy limit, including the override, does not exceed the overall levy ceiling. An override question is placed on the ballot by a majority vote of the selectmen and must follow the language specified in the M.G.L. Ch. 59 Sec. 21C(g). It must gain the approval of a majority of the electorate.
The exclusion option is available if a community wishes to raise additional taxes to fund capital projects, which are defined as goods and/or services for which a town is authorized to borrow under M.G.L. Ch. 44 Sec. 7 & 8. This would include most public building and public works projects, as well as land and certain equipment purchases. A debt exclusion is used to raise additional taxes for the annual debt service costs of capital projects funded by borrowing. A capital outlay expenditure exclusion is used when the capital project is funded not by borrowing but by an appropriation.
Unlike overrides, exclusions do not become part of the tax base and therefore do not result in permanent increases in the amount of property taxes a community can levy. Exclusions are temporary property tax increases. The additional amount is added to the levy limit only during the life of the debt in the case of a debt exclusion, or for the year in which the capital item is acquired in the case of a capital outlay expenditure exclusion. Also, unlike overrides, the amount of an exclusion is not limited. Exclusions may increase the tax levy above the levy ceiling. Exclusion questions, like override questions, are ultimately decided by the voters. The language to be used for a debt exclusion question is found in M.G.L. Ch. 59 Sec. 21C(k), and for a capital outlay exclusion question in M.G.L. Ch. 59 Sec. 21C(i1⁄2). Both exclusions require a two-thirds vote of the selectmen to be placed on the ballot and a majority vote of the electorate for passage.
There are also two types of debt exclusion that do not require voter approval. If a majority of the selectmen vote to accept M.G.L. Ch. 59 Sec. 21C(n), a community may shift all or a portion of its water and sewer capital debt service costs that are currently paid through user charges to the property tax levy. However, the community’s user charges must be reduced by the amount added to the levy.
The second special exclusion relates to homeowners who need to make residential improvements or repairs to meet certain public health code requirements. This debt exclusion allows a municipality, via the board of health, to contract with third parties to repair or replace faulty septic systems, remove underground fuel storage tanks or remove lead paint. The homeowners then repay the municipality by having a portion of the repair cost — with interest — added to their annual property tax bill for up to
20 years. (See M.G.L. Ch.111 Sec. 127B1⁄2.)
Proposition 21⁄2 also allows a community to reduce its levy limit by passing an underride. When an underride is passed, the levy limit decreases by the amount voted. This reduces the base for calculating future years’ levy limits, which in turn results in a permanent decrease in the amount of property taxes the community may levy. An underride question requires a majority vote of the selectmen to be placed on the ballot. It may also be placed on the ballot by means of a local initiative procedure, if one is available by law. Underrides may be approved by majority vote of the electorate (M.G.L. Ch. 59 Sec. 21C(h)).
The Department of Revenue has published a concise and readable primer on Proposition 21⁄2 called Levy Limits: A Primer on Proposition 21⁄2 and a booklet about the referendum procedure called Proposition 21⁄2 Referenda Questions. Both publications are available on the DLS website at www.mass.gov/dls.