|What is New Growth?|
|Excess Levy Capacity?|
Proposition 2 1/2 contains two limitations on the amount of property taxes a city or town can raise:
- The property tax levy ceiling (the amount of revenue a community can raise) can never exceed 2 1/2% of the full cash value of all taxable property in the city or town.
- The property tax levy limit cannot increase from year to year by more than 2 1/2%, with certain exceptions for new growth, or through overrides and exclusions as adopted by the voters.
The tax levy ceiling is determined by calculating 2 1/2% of the total full and fair cash value of taxable real and personal property in Berlin. Full and fair cash value X 2.5% = LEVY CEILING
Example: If full and fair cash value = $100,000,000 multiply by 2.5% = $2,500,000 LEVY CEILING.
The total full and fair cash value of taxable real and personal property in Berlin changes each year as properties are added or removed from the tax roll and market values increase or decrease. This changes the levy ceiling.
Since 1981, when Prop 2 1/2 went into effect, a levy limit for each community has been calculated annually by the Department of revenue. It is based on the previous year’s levy limit and NOT on the previous year’s levy.
Example: Take the previous year’s levy limit and increase it by 2.5%. If the FY03 levy limit was $1,000,000 and you added 2.5% (or $25,000) to that, the levy limit would be $1,025,000. You are also allowed to add certified new growth added to the community’s property tax base and the amount of any authorized overrides votes.
Adding those numbers to the total will give you the FY04 levy limit.
The levy limit provisions of Proposition 2 1/2 affects the total amount of taxes to be raised by a city or town. It does not apply to an individual tax bill.
The voters adopted the Classification Amendment to the Massachusetts Constitution in 1978. It allowed cities and towns to categorize real estate into four classes – residential, commercial, industrial and open space – and to tax these classes at different rates.
Proposition 2 1/2 affects the total amount of tax that can be raised. Classification affects, which classes of taxpayers will pay what specific share of the total amount of tax.
Proposition 2 1/2 contains several provisions for an increase in the tax levy limit:
- The levy limit can be increased by 2 1/2% each year so long as the levy does not exceed 2.5% of the full cash value of all property in the city or town.
- The levy can be increased by the value of new construction and newly taxable parcels. This provision ensures that cities and towns can recover additional service costs resulting from new taxable projects.
- The levy can also be increased by the adoption of an override. An override provision allows the voters of the city or town to raise additional revenues (or to reduce the levy) by the specific amount. This can be accomplished by placing an override question on the ballot in a general or special election, and approving the measure by a simple majority of voters. The increase approved by the voters than becomes part of the base for calculating future years’ levy limits.
- It is important to consider, however, that Proposition 2 1/2 also mandates that the property tax levy for any given year can never exceed the property tax levy ceiling (which is, again, 2 1/2 % of the assessed value of all taxable properties within a city or town). An override of the Proposition 2 1/2-levy limit does not allow the levy to exceed the levy ceiling.
- The levy can be increased by the adoption of an exclusion. The exclusion provision allows the voters of the city or town to exclude bonds or debt issued for municipal capital improvements and is in place only for the length of the borrowing. It does not add to the base for calculating future years’ levy limits.
A community can only levy taxes in excess of its levy limit or levy ceiling through a debt exclusion or capital outlay expenditure exclusion voted at a town meeting. The amount of the exclusion does not become a permanent part of the levy limit base, but allows a community to assess taxes for a certain period of time in excess of its levy limit or ceiling for the payment of certain debt service costs or for the payment of certain capital costs.
Proposition 2 1/2 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. This new growth includes properties that have increased in assessed valuation since the prior year because of development or changes, exempt real property returned to the tax roll and new personal property, and new subdivision parcels and condominium conversions. It is calculated by multiplying the increase in the assessed valuation by the prior year’s tax rate.
A community can choose to set its levy at any amount below or equal to its levy limit. When a community sets its levy below the limit, the difference between the levy and the levy limit is commonly referred to as excess levy capacity. This is an important factor in municipal finance. Before the tax rate is set, the full amount of the levy limit is available to the community regardless of how much of the limit the community has chosen to levy in previous years. This is true no matter what the percentage increase in the levy would be in order to achieve this result.