You asked us to explain how Massachusetts' Proposition 2½ works. You also asked if Connecticut law authorizes towns to adopt a similar policy and, if so, whether they could give renters a “2½% government tax benefit. ” Part of your question requires a legal opinion, which OLR cannot give. Consequently, you should not regard this report as providing one.

SUMMARY

Proposition 2½ is a Massachusetts law that limits the extent to which municipalities can annually increase property tax levies. The law was enacted in 1980 via a ballot initiative. The law created a flexible structure that allows revenues to grow in a controlled and predictable manner. The structure consists of an overall levy ceiling set at 2. 5% of the value of a municipality's taxable property and an annual, state-determined levy limit that cannot exceed the ceiling.

But these constraints are elastic. The levy ceiling rises as a municipality's tax base expands. The levy limit must be incrementally increased each year according to statutory criteria. If its voters approve, the municipality may increase or decrease the annual levy limit, and the new limit becomes the basis for calculating the subsequent year's limit. The municipality can also temporarily raise revenue above the levy ceiling to fund capital projects or other specified activities, again if the voters approve.

Connecticut law is silent on whether municipalities can impose levy limits. But they may be able to do so under the general power to establish and maintain a budget system. The degree to which they can adopt Proposition 2½ type limits depends on whether they are operating under the statutes or a home rule charter. The legislature may have to amend the statutes to allow statutory towns to adopt ordinances imposing ceilings and limits. Charter towns can impose these constraints by amending their charters.

Statutory and charter towns may offer only those property tax benefits the statutes explicitly authorize. Consequently, the legislature would have to amend the statutes to allow or require towns with levy limits to provide tax benefits to renters. The legislature could specify the type and amount of tax relief (e. g. , $ 1,500 veterans property tax exemption) or allow towns to decide this themselves (e. g. , local option elderly property tax relief).

PROPOSITION 2½

Constraining Factors

Proposition 2½ limits the amount of property tax revenue Massachusetts municipalities can raise each year (Mass. Gen. Laws Chapter 59, § 21C). It does this by imposing two types of constraints—levy ceilings and levy limits. The levy ceiling is the maximum amount of revenue a municipality can raise; it equals 2. 5% of the “full and fair cash value” of all taxable real and personal property. The levy limit is the maximum amount of revenue municipalities can raise in any given year; it can be no greater than the levy ceiling.

Figure 1 shows the relationship between the levy ceiling and the municipality's tax base (i. e. , the taxable grand list). As the figure shows, the base expands or shrinks as properties are added to or removed from the taxable grand list. Consequently, the levy ceiling goes up or down in response to changes to the taxable grand list.

Figure 1: Levy Ceiling

Time 1 Time 2A Time 2B

Whether the municipality can generate revenue up to the levy ceiling depends on the second constraint, the levy limit. The state Revenue Department annually sets this limit based on the prior year's limit plus certain allowable increases that we describe below. The actual amount of property tax revenue the municipality generates (i. e. , the levy) cannot exceed the annual levy limit. Figure 2 shows the relationship between the levy ceiling, levy limit, and the actual levy.

Figure 2: Levy Ceiling and Levy Limit

Automatic Increases to the Levy Limit and Levy Ceiling

Proposition 2½ requires annual adjustments to the levy limit and levy ceiling. Figure 3 shows how the levy limit must be automatically increased each year.

Figure 3: Automatic Increases to the Levy Ceiling

In setting the annual levy limit, the Revenue Department must increase the prior year's limit by 2. 5%. The municipality must also increase the limit by adding a portion of the value of property that was developed or improved during the previous year. The portion equals that value multiplied by the previous year's tax rate. For example, if the total value of the newly developed or improved property was $ 1 million and the prior year's tax rate was . 015, the municipality must add $ 15,000 to the 2. 5% increase.

Discretionary Increases to the Levy Limit and Levy Ceiling

The municipality can further increase the levy limit or levy ceiling by adopting “overrides” and “exclusions. ” By adding an override, it can increase the levy limit up to the levy ceiling, as Figure 4 shows. To do so, the municipality's legislative body must first approve submitting the override amount to the voters in a ballot question. If a majority of those voting approve, the override is permanently added to the levy limit because the Revenue Department must include it when it calculates the municipality's subsequent year levy limit.

Figure 4: Discretionary Increases to Levy Limit

The municipality can temporarily increase the levy limit or levy ceiling to fund capital projects (i. e. , capital outlay expenditure exclusion) or pay debt service (i. e. , debt exclusion). As Figure 5 shows, a capital outlay expenditure is added to the limit or ceiling only for the year the project is started; the debt exclusion amount is added to either of these thresholds only during the years the municipality is paying the debt service. Unlike overrides, exclusion amounts do not count toward the municipality's subsequent annual levy limit.

Figure 5: How the Ceiling Can Rise

Both types of exclusions require legislative body and voter approval. The legislative body must agree by a two-thirds vote to submit the exclusion to the voters in a ballot question. The municipality can add the exclusion to the levy limit or ceiling if a majority of those voting approve.

Proposition 2½ does not require voter approval to pay the debt service on water and sewer projects or fund programs helping homeowners repair or replace faulty septic systems, remove underground storage fuel storage tanks, or remove hazardous paint (i. e. , special exclusions). As with the other exclusions, special exclusions do not count toward the municipality's subsequent levy limit.

Reducing the Levy Limit

Proposition 2½ allows the municipality to reduce the levy limit by adopting an “underride. ” As Figure 6 shows, the underride amount is subtracted from the levy limit after the automatic increase and new growth is added to the prior year's limit. The effect is permanent because the Revenue Department must use the reduced limit to calculate the subsequent year's limit.

Figure 6: Reducing the Levy Limit by $ 5 million

There are two ways to adopt an underride. The legislative body, by majority vote, may submit the underride to the voters. The municipality must subtract the underride from the levy limit if a majority of the voters approve. If a municipality allows voters to petition for a referendum, its voters can also propose an underride.

AUTHORITY TO ADOPT MUNICIPAL LEVY LIMITS IN CONNECTICUT

Statutory Towns

Connecticut law does not explicitly authorize towns to set revenue limits, but the power to do so may be implied in the statute that authorizes them to “establish and maintain a budget system” (CGS § 7-148(c) (2) (A)). But the extent to which a town can customize its budget system depends on whether it operates under the statutes or a home rule charter. Towns operating under the statutes may have only a board of selectmen-town meeting form of government. Consequently, the town meeting, as the legislative body, must approve the budget. Arguably, it can adopt an ordinance imposing revenue limits and specifying how they may be adjusted.

But the town meeting's authority to set revenue limits is less clear if it shares budgeting powers with a board of finance. By law, the board must prepare the town's budget, present it at a public hearing, and submit the final draft to the town meeting for approval (CGS § 7-344). In approving the budget, the town meeting can only reduce the board's appropriated amounts.

Given these statutorialy prescribed roles, it's not clear if the town meeting could adopt an ordinance imposing revenue limits on the board. Arguably, the town meeting and the board could informally agree on revenue limits and the conditions under which they may be exceeded. But the agreement would not have the force of law. For this reason, the legislature would have to amend the statutes to authorize the town meeting (or the board of finance) to set revenue limits.

Charter Towns

In charter towns, the charter determines whether the town can set revenue limits. The charter might specify the process for adopting a budget or authorize the legislative body to adopt an ordinance specifying that process. If the charter specifies the process, then the town must revise it to include revenue limits. If it requires the legislative body to specify the process, then the legislative body could amend the implementing ordinance without the town having to revise the charter.

Referendum on exceeding revenue limits

The division between statutory and charter towns also determines whether towns adopting levy limits and ceilings can hold referenda to exceed them. In statutory towns, voters may petition to have the proposed budget approved at a referendum (CGS § 7-7). But the statutes granting that power do not provide for an automatic referendum when the budget exceeds a specified limit. Consequently, the legislature would have to amend the statutes by specifying the conditions triggering a referendum.

Charter towns can adopt levy limits on their own. A town could amend its charter to require a referendum anytime a proposed budget exceeds the limit. It could also specify the purposes for which the town can exceed the limits and, like Proposition 2½, require the legislative body to approve levies above those limits before submitting them to the voters for final approval.

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