Effects of Proposition 2 ½
Thanks to a surging economy and smart policies implemented by Mayor Walsh, property values in Boston continue to rise steadily. In FY17, property values increased by $15.9 billion or 12.4%, and in FY18, property values increased by $9.9 billion or 6.9% to $153.9 billion.
However, in Massachusetts, Proposition 2 ½ constrains the amount of property tax revenue the City can raise each year from its existing tax base. Proposition 2 ½ limits the property tax levy in a city or town to no more than 2.5% of the total fair cash value of all taxable real and personal property. It also limits the total property tax levy to no more than a 2.5% increase over the prior year’s total levy with certain provisions for new construction.
This means that while total property value has grown 54% since FY14, property tax revenue has grown by only 25%. In each year since FY85, the City has increased its levy by the 2.5% allowable under the limits set forth in Proposition 2 ½
Keeping Boston Affordable
Despite these constraints, the Mayor is committed to keeping residential property tax bills down to retain more low and middle class homeowners in the city. Policies the Mayor has pursued are demonstrating success, as residential taxes fall 41% below last year’s statewide average.
Mayor Walsh advocated for a change in State law that increased the residential exemption limit from 30% to 35% of the average assessed value of all Class One residential properties. This year, the City Council, with the approval of the Mayor, once again chose the maximum exemption allowed by law. The FY18 residential exemption amount increased by $106 over last year’s amount.
Additionally, the FY18 classified tax rates decreased from the FY17 levels, resulting in substantial savings for the City’s residential taxpayers, while still maximizing its taxable levy.
Unprecedented New Growth
During these same years, the levy has also been positively impacted by taxable new value or “new growth” that is excluded from the levy limit. New growth can arise from both real and personal property.
Due in part to efforts to attract business development to Boston and grow its housing stock, Boston experienced unprecedented new growth property tax revenue over the past two fiscal years. In FY19, we expect new growth to continue, but will likely not exceed experiences in FY17 and FY18. New growth is expected to be approximately $55.0 million in FY19, which is very high compared to historical levels of new growth seen prior to FY17.
Proposition 2 ½ ceiling
Any significant decline in property values can present a problem for cities as dependent on the property tax as Boston. As property values decreased in the early 1990’s, and the City continued each year to maximize the allowable levy increase under Proposition 2 ½, the levy rapidly approached the levy ceiling of 2.5% of total assessed value. Reaching the 2.5% ceiling would have further limited the City’s capacity to increase the annual levy.
However, due to years of strong new growth increases, the City has some space between its FY18 net effective tax rate of 1.44% and the tax levy ceiling of 2.5%. If the real estate market were to depreciate, the City’s lack of proximity to the 2.5% property tax rate threshold will insulate revenues from an immediate shock. However, if values were depressed long enough, future growth of the property tax would be impaired.