Massachusetts home buyers will want to take into consideration the total cost of purchasing a home. Besides the price of a home and the cost of borrowing, as well as other costs, home buyers will want to consider real estate taxes in the city or town they plan to buy a home in.
Local real estate tax rates vary throughout Massachusetts; however, there are some limitations to a city's or town's ability to raise property taxes.
Proposition 2½, named after an state initiative petition, became Massachusetts state law in 1982, with the purpose of setting limits on real estate and personal property taxes. Massachusetts voters passed the law by initiative petition in 1980. In Massachusetts, tax rates for real property and personal property vary from city and town.
A community’s property taxes are the sum of the following: (1) residential real estate; (2) commercial real estate; (3) industrial real estate; (4) business-owned personal property; and (5) motor vehicle excise taxes.
Proposition 2½ sets two different real estate taxation limits in Massachusetts:
A. Tax Ceiling. The first collection limit is that a municipality cannot collect more than 2.5 percent ($25 of every $1000) of the assessed value of all real estate and personal property in the community. For example, if all the assessed value of property in a municipality added up to $100 million, the most the city/town would be allowed to tax would be $2.5 million. The real estate and personal property being taxed is based on the property’s fair market value – which is the “total full and fair cash” value determined by the community’s assessor’s office.
B. Increase limit. The second taxation limit that Proposition 2½ imposed is that a municipality may only increase its total property tax levy by 2.5 percent each fiscal year. For example, if a particular city or town in Massachusetts currently is levying 2.0 percent, the town could only increase that levy to 2.05 percent in one year.
It is a common misunderstanding that Proposition 2½ prohibits the property taxes of one particular property from increasing by more than 2.5 percent in one fiscal year. That is not the law; it only affects the total taxation of a city or town’s property taxation.
A town or city is permitted to increase its levy limit by more than 2.5 percent under special circumstances and conditions. The most common exclusion is new growth. If a community experiences growth, the resulting new property taxes will expectantly raise the tax collections and Proposition 2½ is calculated without accounting for the new property taxes raised through growth.
Also, voters in a community can vote for what are known as overrides and exclusions, which can either temporarily or permanently increase the levy limit, but not the ceiling, above 2.5 percent of the previous taxable year.
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.
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 time for the borrowing. It does not add to the tax base for calculating future years' levy limits.
Some communities have a track record of voting for overrides and debt exclusions, thus voluntarily raising their own property taxes. Other communities' voters are known for rejecting ballot questions regarding overrides and debt exclusions.