Proposition 2 1/2
WHAT IS PROPOSITION 2½?
Proposition 2 ½ refers to a Massachusetts law enacted in 1980 that places strict limits on the amount of property tax revenue a community can raise through real and personal property taxes. This revenue is called the Tax Levy, or just Levy. Proposition 2 ½ limits how much the levy can be increased from year-to-year. The maximum amount a community can levy in any given year is called the Levy Limit.
Under Proposition 2 ½, a community’s levy limit increases automatically by two factors: 1) an incremental increase of 2.5% of the prior year’s levy limit (hence the law’s nickname); and 2) a dollar amount derived from the value of new construction and other growth in the local tax base since the previous year. This second factor is called New Growth. The 2 ½% increase and new growth number are both added to the prior year’s levy limit to reach the current year’s levy limit.
It is important to understand that the 2 ½% increase limitation applies only to the Levy Limit, and not to your property tax bill. It is a common misconception that Proposition 2 ½ restricts the amount your property tax bill can increase to 2 ½%. Increases in New Growth will also impact your property tax bill. Andover’s New Growth history is shown on the next page.
A community may not tax in excess of its Levy limit, but it may tax an amount lower than the Levy Limit. The difference is called Excess Levy capacity. For the past several years, Andover’s Select Board have voted to tax below the levy limit, holding $300,000 as excess levy capacity. This reduces the increase in property taxes and the burden to the taxpayer. For additional detail on your tax projections, please see pages 16-17 of this report.
A community cannot exceed its levy limit without voter approval. If Town Meeting votes to spend more than the Town can expect to collect in revenues, Proposition 2½ provides local options for increasing the Levy Limit by passing, by majority vote in an election, an override, capital outlay exclusion, or debt exclusion. The Levy Limit can be increased only by popular vote in a referendum, not by Town Meeting.
By passing an Override a community can assess a specific amount of property taxes in addition to its Levy Limit. The ballot question can specify the use of these additional revenues for the first year. An override results in a permanent increase in the Levy Limit. It is intended for funding ongoing programs. No overrides have successfully been approved by voters in Andover.
By passing a Debt Exclusion a community can assess additional taxes to pay the debt service (principal and interest costs) for a specific capital project. The additional amount is added to the Levy Limit for the life of the debt only. Each year that a payment must be made for that project, the Levy Limit is first calculated as usual and then the extra amount from the debt exclusion is added. Unlike overrides, exclusions do not become part of the base used to calculate future years’ levy limits. Andover voters have approved debt exclusion overrides for the construction of new school buildings.
By passing a Capital Outlay Expenditure Exclusion a community can assess additional taxes to pay for a specific project or major equipment purchase. The additional amount to pay for the project is added to the Levy Limit only for the year in which the project is undertaken. The amounts excluded for these one-time expenditures do not become part of the base. Capital outlay exclusions can only be used for expenditures that could be bonded.
The Massachusetts Department of Revenue has published an excellent, easy to understand publication entitled Levy Limits: A Primer on Proposition 2 ½. This publication is on the Town of Andover website at this link: www.andoverma.gov/prop2half