Property Tax Limits and Local Fiscal Behavior: Did Massachusetts Cities and Towns Spend Too Little on Town Services Under Proposition 2.5

44 Pages Posted: 21 Mar 1997

See all articles by Katharine Bradbury

Katharine Bradbury

Federal Reserve Bank of Boston

Christopher J. Mayer

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Karl E. Case

Deceased

Date Written: April 1997

Abstract

This paper examines the impact of a specific local tax limit, Proposition 2* in Massachusetts, on the fiscal behavior of cities and towns in Massachusetts and the capitalization of that behavior into property values. Proposition 2* places a cap on the effective property tax rate at 2.5 percent and limits nominal annual growth in property tax revenues to 2.5 percent, unless residents pass a referendum (an override) allowing a greater increase. The study analyzes the 1990-94 period, a time when Massachusetts municipalities faced significant fiscal stress because of a 30 percent cut in real state aid and a demographically driven increase in school enrollments. The findings include the following: (1) Proposition 2* significantly constrained local spending in some communities; (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 school spending were a much stronger influence on house price changes than were changes in nonschool spending. These findings are confirmed using several different econometric approaches, including a two stage technique that directly estimates how close each community?s spending was to what it would have been in the absence of Proposition 2.

JEL Classification: H72, H73, R21

Suggested Citation

Bradbury, Katharine and Mayer, Christopher J. and Case, Karl E., Property Tax Limits and Local Fiscal Behavior: Did Massachusetts Cities and Towns Spend Too Little on Town Services Under Proposition 2.5 (April 1997). Available at SSRN: https://ssrn.com/abstract=8739 or http://dx.doi.org/10.2139/ssrn.8739

Katharine Bradbury

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Christopher J. Mayer (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Karl E. Case

Deceased

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