Real Estate Terms - What Does it Mean? - Proposition 2½ - Wikipedia, the free encyclopedia

Proposition 2½ - Wikipedia, the free encyclopedia

Alot of times terms are used in discussing real estate, sometimes it's nice to learn more about what the term means and what it entails. Today I picked Proposition 2 1/2 to look into more deeply with the current financial strains our cities & towns are experiencing.

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Proposition 2½ (Mass. Gen. Laws Ch. 59 § 21C[1]) is a Massachusetts statute which limits property tax increases by Massachusetts municipalities. It was passed by ballot initiative,[2] specifically called an initiative petition within Massachusetts state law, in 1980 and went into effect in 1982. The name of the initiative refers to the 2.5% annual limit on the increase in taxes that a municipality is permitted. It is similar to other tax revolt measures passed around the same time in other parts of the United States.

Real and personal property taxes
Under Proposition 2½, a municipality is subject to two property tax limits:

1.Ceiling: The total annual property tax revenue raised by a municipality shall not exceed 2.5% of the assessed value of all taxable property contained in it.

2.Increase limit: The annual increase of property tax cannot exceed 2.5%, plus the amount attributable to taxes that are from new real property.

These limits refer to the entire amount of the annual tax levy raised by a municipality. The property taxes are the sum of: (a) residential real property; (b) commercial real property; (c) industrial real property; and (d) business-owned personal property. In practice, it usually limits the tax bills of individual taxpayers, but only as an indirect result.

A side effect of Proposition 2½ is that municipality income will decline in real terms whenever inflation rises above 2.5%. Historically inflation has been above 2.5% for a significant majority of the years since 1980 (22 out of the 28 years to date), thus resulting in a real decline in local tax rates and local spending ability.

Vehicle excise tax
The excise tax for automobiles registered in Massachusetts was also lowered by Proposition 2½. Previously, this tax was levied at a rate of $66.00 per $1,000 of car valuation (6.6%), one of the highest automotive taxes of its kind in the United States. Proposition 2½ lowered this rate to only $25.00 per $1,000 of car valuation, resulting in a 2½ per cent excise tax rate.[3]

Proposition 2½ excludes four cases from the tax levy increase:

"New growth": The Act allows for new growth. So, for example, when a new house is built, the tax levy may increase by the amount of taxes collected from that house.
And three types of exclusions granted by the majority those voting in a in municipal referendum:

"Capital exclusion": Capital expenditure for the upcoming fiscal year;[4]
"Debt exclusion": For pre-1980 municipal debt or new debt issued for a designated purpose (e.g. bonds issued for a multi-year capital expense);[5] or
Water/sewer debt: For certain water and sewer system debt.[6]

Override / Underride
Municipalities may exceed or reduce the limits with the prior approval of the majority those voting in a in municipal referendum to:

"Operational override": Override the increase limit.[7]
"Underride": The levy limit is reduced. Such a vote can be initiated by popular petition or the municipal legislature.[8]

Since 1983, municipalities have requested, via referendum, 4,449 overrides of Proposition 2½. 1,798 of them have passed. 16 underrides have also been requested. 9 of them have passed. [9]
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