Proposition 2 ½ refers to a Massachusetts law enacted in 1980 that limits the amount of property tax revenue a community can raise through real and personal property taxes. The amount actually raised is technically called the “Tax Levy.” The maximum amount a community can levy in any given year is called the “Levy Limit.” Proposition 2 ½ limits how much the Levy Limit can be increased from year to year.
Under Proposition 2 ½, a community’s levy limit increases annually by two factors:
1) an incremental increase of 2.5% of the prior year’s Levy Limit (hence the name “Proposition 2 ½”), and
2) a dollar amount derived from the value of new construction and other growth in the local tax base since the previous year, referred to as “New Growth.”
Notably, the restriction on raising taxes more than 2.5% is based upon the prior year’s Levy Limit, rather than on the prior year’s Tax Levy. Thus, if in a particular year the Town assesses taxes below the Levy Limit, the next year, the Levy Limit will still rise by 2.5% and new growth over the prior year. In that case, it is possible that taxes may increase more than 2.5 %. A common misconception is that Proposition 2 ½ restricts the amount an individual’s property tax bill can increase.
A community can exceed its Levy Limit for limited reasons and only with voter approval. One such reason, called a Debt Exclusion, allows a municipality to raise funds outside the Levy Limit for the limited period of time needed to repay the debt and interest on a loan for a particular capital purpose.
In our case, the Debt Exclusion would allow funds to be used to repay a loan for the costs of constructing a new elementary school to replace two older schools. The additional amount would be raised outside of the Levy Limit for the life of the debt only. Stated differently, Debt Exclusions do not become part of the base used to calculate the annual 2.5 % increase in the Town’s Levy Limit. Instead, the increase is temporary and lasts only for the life of the bonds.
