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Property tax limitations and local fiscal conditions: The impact of Proposition 2½ in Massachusetts

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  • Wallin, Bruce
  • Zabel, Jeffrey
Abstract
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. 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 activity and local fiscal condition. 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 condition, both in the short-run and long-run. Further, previous override attempts increase the likelihood of current override activity. The recent economic downturn has resulted in difficult times for local governments. Cuts in state aid have a disproportionate impact on poorer towns. These towns have been less able to attempt and to pass overrides and hence they have not been able to reap the benefits that this has for their fiscal condition. They are faced with reducing expenditures (e.g. teacher layoffs) or passing overrides to increase revenues. We find that worsening fiscal conditions lead to more overrides so we expect to see more override activity in the near future.

Suggested Citation

  • Wallin, Bruce & Zabel, Jeffrey, 2011. "Property tax limitations and local fiscal conditions: The impact of Proposition 2½ in Massachusetts," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 382-393, July.
    • Handle: RePEc:eee:regeco:v:41:y:2011:i:4:p:382-393
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    References listed on IDEAS

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    1. Cutler, David M. & Elmendorf, Douglas W. & Zeckhauser, Richard, 1999. "Restraining the Leviathan: property tax limitation in Massachusetts," Journal of Public Economics, Elsevier, vol. 71(3), pages 313-334, March.
    2. Andrew Reschovsky & Amyellen Schwartz, 1992. "Evaluating the Success of Need-Based State Aid in the Presence of Property Tax Limitations," Public Finance Review, , vol. 20(4), pages 483-498, October.
    3. Katharine L. Bradbury, 1991. "Can local governments give citizens what they want? Referendum outcomes in Massachusetts," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-22.
    4. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64(5), pages 416-416.
    5. Bradbury, Katharine & Zhao, Bo, 2009. "Measuring Non–School Fiscal Disparities Among Municipalities," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(1), pages 25-56, March.
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    Cited by:

    1. Dronyk-Trosper, Trey, 2017. "Getting what we vote for: A regression discontinuity test of ballot initiative outcomes," Regional Science and Urban Economics, Elsevier, vol. 64(C), pages 46-56.
    2. Jeffrey Zabel, 2014. "Unintended Consequences: The Impact of Proposition 2½ Overrides on School Segregation in Massachusetts," Education Finance and Policy, MIT Press, vol. 9(4), pages 481-514, October.
    3. Wenchi Wei, 2021. "State fiscal constraint and local overrides: a regression discontinuity design estimation of the fiscal effects," Public Choice, Springer, vol. 189(3), pages 347-373, December.
    4. Larson, William D. & Shui, Jessica, 2022. "Land valuation using public records and kriging: Implications for land versus property taxation in cities," Journal of Housing Economics, Elsevier, vol. 58(PA).
    5. Bigelow, Daniel P. & Kuethe, Todd, 2023. "The impact of preferential farmland taxation on local public finances," Regional Science and Urban Economics, Elsevier, vol. 98(C).
    6. Michelle L. Lofton, 2022. "The impact of excess taxing capacity on short‐term resources," Public Budgeting & Finance, Wiley Blackwell, vol. 42(1), pages 3-27, March.
    7. Alm, James & Buschman, Robert D. & Sjoquist, David L., 2014. "Foreclosures and local government revenues from the property tax: The case of Georgia school districts," Regional Science and Urban Economics, Elsevier, vol. 46(C), pages 1-11.
    8. Alm, James & Buschman, Robert D. & Sjoquist, David L., 2011. "Rethinking local government reliance on the property tax," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 320-331, July.
    9. Bigelow, Daniel P. & Kuethe, Todd H., 2020. "The impact of preferential farmland taxation on local public finances," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304291, Agricultural and Applied Economics Association.
    10. Hawley, Zackary & Rork, Jonathan C., 2015. "Competition and property tax limit overrides: Revisiting Massachusetts' Proposition 2½," Regional Science and Urban Economics, Elsevier, vol. 52(C), pages 93-107.

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