Property tax limits, local fiscal behavior, and property values:: evidence frolic Massachusetts under Proposition 21/2

This paper examines the impact of a specific property tax limit, Proposition 2 1/2 in Massachusetts, on the fiscal behavior of cities and towns in Massachusetts and the capitalization of that behavior into property values. Proposition 2 1/2 places a cap on the effective property tax rate at 2.5% and limits nominal annual growth in property tax revenues to 2.5%, unless residents pass a referendum allowing a greater increase. The study analyzes the 1990-1994 period, a time when Massachusetts municipalities faced significant fiscal stress because of a 30% cut in real state aid and a demographically driven Increase in school enrollments. The findings include the following: (1) Proposition 2 1/2 significantly constrained local spending in some communities, with most of its impact on school spending; (2) constrained communities realized gains in property values to the degree that they were able to increase school spending despite the limitation; and (3) changes in non-school spending had little impact on property values. (C) 2001 Elsevier Science B.V. All rights reserved.