Prop 2 1/2 in a nut shell.
What is a Levy? The property tax levy is the revenue a community can raise through real and personal property taxes. We will refer to the property tax levy simply as the levy.
In Massachusetts, municipal revenues to support local spending for schools, public safety and other public services are raised through the property tax levy, state aid, local receipts and other sources.
What is a Levy Ceiling? What is a Levy Limit?
Proposition 21 ⁄2 places constraints on the amount of the levy raised by a city or town and on how much the levy can be increased from year to year.
A levy limit is a restriction on the amount of property taxes a community can levy. Proposition 21 ⁄2 established two types of levy limits: First, a community cannot levy more than 2.5 percent of the total full and fair cash value of all taxable real and personal property in the community. In this primer we will refer to the full and fair cash value limit as the levy ceiling.
Second, a community’s levy is also constrained in that it can only increase by a certain amount from year to year. We will refer to the maximum amount a community can levy in a given year as the levy limit. The levy limit will always be below, or at most, equal to the levy ceiling.
The levy limit may not exceed the levy ceiling. Proposition 21 ⁄2 does provide communities with some flexibility. It is possible for a community to levy above its levy limit or its levy ceiling on a temporary basis, as well as to increase its levy limit on a permanent basis. These options are discussed in more detail in other sections of this primer. The concepts of levy ceiling and levy limit are illustrated in Figure 1.
How is a Levy Ceiling Calculated? The levy ceiling is determined by calculating 2.5 percent of the total full and fair cash value of taxable real and personal property in the community:
Full and Fair Cash Value x 2.5% = LEVY CEILING
Full and Fair Cash Value = $100,000,000
$100,000,000 x 2.5% = $2,500,000
In this example, the levy ceiling is $2,500,000.
How is a Levy Limit Increased?
The levy limit is increased from year to year as long as it remains below the levy ceiling. Permanent increases in the levy limit result from the following:
Automatic 2.5 percent increase. Each year, a community’s levy limit automatically increases by 2.5 percent over the previous year’s levy limit. This does not require any action on the part of local officials; the Department of Revenue calculates this increase automatically.
New Growth. A community is able to increase its levy limit each year to reflect new growth in the tax base. Assessors are required to submit information on growth in the tax base for approval by the Department of Revenue as part of the tax rate setting process.
Overrides. A community can permanently increase its levy limit by successfully voting an override. The amount of the override becomes a permanent part of the levy limit base.
What is a Debt Exclusion? What is a Capital Outlay Expenditure Exclusion? Proposition 21 ⁄2 allows a community to raise funds for certain purposes above the amount of its levy limit or levy ceiling. Acommunity can assess taxes in excess of its levy limit or levy ceiling for the payment of certain capital projects and for the payment of specified debt service costs. An exclusion for the purpose of raising funds for debt service costs is referred to as a debt exclusion, and an exclusion for the purpose of raising funds for capital project costs is referred to as a capital outlay expenditure exclusion. Both exclusions require voter approval with very limited exceptions.
