How Proposition 2 1/2 Works
Prior to the passage of Proposition 2 1/2, municipalities created their budgets by determining how much it would cost to provide the city's programs and services, and then raising the necessary funds through the tax levy. Under Proposition 2 1/2, municipalities in Massachusetts are limited to increasing the local tax levy by no more than 2 1/2% above the current tax levy plus new growth in any one year. The shift means that instead of beginning with a budget based on the programs and services the city wants to provide, the city now begins with a set amount of tax levy funding and determines what programs and services it can provide based on that amount. As an example, if the tax levy in Year One was $1,000, and there was $100 in new growth (new construction or additions to homes or businesses), then in Year Two, the city's tax levy could grow to no more than $1,125.
($1,000 levy x 2.5% = $25
$1,000 + $25 + $100 new growth = $1,125)
In the chart above, the green bar indicates the base levy from the previous fiscal year. This is the starting point for calculating the next year's tax levy.
The pink bar represents the 2 1/2% allowable increase over the tax levy from the previous year.
The orange bar represents new growth in the city - new construction or additions to homes or businesses which add to the city's tax rolls.
The blue bar represents debt exclusions, those overrides which allowed the city to increase property taxes for the purpose of paying for a particular project, such as the JFK Middle School or Northampton High School renovations. This amount decreases every year until they are fully paid off. This portion of residential property taxes go down each year.
Proposition 2 1/2 is a complex finance law, but its simple name has led to some frequent misunderstandings. Often, residents might think that the law means that their individual property taxes should only rise by 2 1/2 % each year under the law. In reality, it is the city's total tax levy that will rise by that amount each year. How that levy is apportioned among all the residential and commercial properties is through a different process, and it results in the tax burden on some properties to increase, and on others to decrease, and by varying amounts.
The city is required to revalue all property every three years. When this happens, an independent company comes in to assess the values of homes and businesses relative to each other and to the current market. They look at sales of comparable properties in the last two years to arrive at fair market values. When they are done, we have the total value of all of the properties in Northampton.
Once we have those two figures - the total value of real estate property in Northampton, and the amount of tax levy we can raise under Proposition 2 1/2 - the city Assessors calculate what the city's Tax Rate will be in the coming year. In the current fiscal year, the tax rate is $11.48 per $1,000 of value in your property.
Now that we have the tax rate, we go back to the evaluations of each property in the city and calculate the tax bill for individual property owners. If your property is valued at $100,000, your property tax bill would be 100 x $11.48, or $1,148.
If you believe your property assessment is significantly higher than its actual value on the fair market, you can apply for a tax abatement. Remember, however, that while market forces change daily, your home's value for the purposes of the tax levy is calculated on comparable sales in the past two years.
If a home is found to have been valued incorrectly and receives an abatement, those tax dollars that are abated for that one property owner are reassessed over the rest of the taxable properties in Northampton. The total of the city's property tax levy remains the same, only the distribution changes.