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. The property tax levy is the largest source of revenue for most cities and towns.
How is a Levy Limit Calculated?
Since 1981, when Proposition 2½ went into effect, a levy limit for each community has been calculated annually by the Department of Revenue. It is important to note that a community's levy limit is based on the previous year's levy limit and not on the previous year's actual levy.
Each step in the example below is explained in more detail in other sections. A levy limit is calculated by:
This community's levy limit, the maximum amount in real and personal property taxes it can levy, is $1,140,000 for FY2004. How much of this amount the community actually wants to use - that is, the amount of the levy - is up to the discretion of local officials. The community can levy up to or at any level below the entire levy limit amount, regardless of what its levy was in the previous year.
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.
* Fair cash value has been defined by the Supreme Judicial Court as:
"fair market value, which is the price an owner willing but not under compulsion to sell ought to receive from one willing but not under compulsion to buy. It means the highest price that a normal purchaser not under peculiar compulsion will pay at the time, and cannot exceed the sum that the owner after reasonable effort could obtain for his property. A valuation limited to what the property is worth to the purchaser is not market value. The fair cash value is the value the property would have on January first of any taxable year in the hands of any owner, including the present owner" (Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566(1956).
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:
1. 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.
2. 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.
What is New Growth?
Proposition 2½ allows a community to increase its levy limit annually by an amount based on the increased value of new development and other growth in the tax base that is not the result of revaluation. The purpose of this provision is to recognize that new development results in additional municipal costs; for instance, the construction of a new housing development may result in increased school enrollment, public safety costs, and so on.
New growth under this provision includes:
· Properties that have increased in assessed valuation since the prior year because of development or other changes.
· Exempt real property returned to the tax roll and new personal property.
· New subdivision parcels and condominium conversions.
New growth is calculated by multiplying the increase in the assessed valuation of qualifying property by the prior year's tax rate for the appropriate class of property.
3. 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 2½ allows a community to raise funds for certain purposes above the amount of its levy limit or levy ceiling. A community 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.
The additional amount for the payment of debt service is added to the levy limit or levy ceiling for the life of the debt only. The additional amount for the payment of the capital project cost is added to the levy limit or levy ceiling only for the year in which the project is being undertaken. Unlike overrides, exclusions do not become part of the base upon which the levy limit is calculated for future years.
Reimbursements such as state reimbursements for school building construction are subtracted from the amount of the exclusion.
A capital outlay expenditure exclusion or debt exclusion is effective even in the rare case when the exclusion would bring the community's levy above its levy ceiling.
Both of these exclusions require a two-thirds vote of the community's selectmen, or town or city council (with the mayor's approval if required by law) in order to be presented to the voters. A majority vote of approval by the electorate is required for both types of exclusion.
Questions presented to exclude a debt obligation must state the purpose or purposes for which the monies from the debt issue will be used. Questions presented to exclude a capital outlay expenditure exclusion must state the amounts and purposes of the expenditure.
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