Tax cap courts tragedy

Proposition 2 1/2 has been a godsend for taxpayers, but it may contain the seeds of its own destruction

scholars often differ on whether the title character in Shakespeare’s Macbeth was the play’s hero or villain. The same could be said about Proposition 2½. Macbeth initially saved a kingdom that he ultimately puts into peril. Frankly, hasn’t Prop. 2½ done the same? Like the Macbeth debate, the answer about the virtue of Prop. 2½ may lie in one’s perspective.

Proposition 2½ was championed as the salvation for taxpayers who were so angry about high property taxes that their 1980 citizen revolt led to this state’s most celebrated ballot question triumph. Today, Prop. 2½ is still working effectively to hold down property tax increases. It caps the annual growth of existing property tax revenues at 2.5 percent above the previous year, allows for new growth in property taxes as a result of new investments, and limits property tax collections to 2.5 percent of a community’s overall valuation. Rules are in place for overrides and underrides of those limitations. Prop. 2½ is often the protagonist in any story on municipal finance. Again, though, depending on your perspective, Prop. 2½ may have a Macbeth-like incongruity.

The citizen initiative petition is typically undertaken to address a pressing issue that the public believes their elected officials have failed to adequately address. Ironically, the “fix” adopted by voters in 1980 regarding high property taxes has actually been successful in large part because of those very state officials in whom the public demonstrated a lack of confidence.

What has allowed Prop. 2½ to work is the dramatic growth of non-school local aid. Governors and legislators, fearing the suffering that could take place in municipalities set to lose so much locally generated revenue as a result of Prop. 2½, increased state aid to cities and towns during the 1980s by a whopping 425 percent. That’s right, an average of 42.5 percent a year for 10 years in the two major categories of non-school local aid: lottery aid and additional assistance. Yes, there was some pain in communities along the way, but 42.5 percent a year went a long way toward easing the suffering and allowing the public to believe they could actually lower property taxes and still maintain the vital services they needed and expected.

Unfortunately, cities and towns — either heroes or villains in the municipal finance story, depending on one’s perspective — have suffered a reversal of fortune since the opening act of the 1980s. The 1990s saw lottery aid and additional assistance increase by just 7 percent for the entire decade. But that seems like a windfall of riches to those of us managing today; the decade that ended last year produced a reduction in those major accounts by 22 percent.

The revenue loss that cities and towns have seen in non-school local aid over more than two decades has had a dramatic impact on municipal services. In fact, those who revere Prop. 2½ for keeping property taxes relatively low are often among those who decry the cuts in public safety, education, and infrastructure maintenance. This is a paradox truly worthy of a Shakespearean tragedy.

those who continue to defend and champion the virtue of Proposition 2½ can rightly point to millions and maybe billions of dollars in property tax revenues the law has saved taxpayers. Prop. 2½ can also be credited with forcing austerity onto cities and towns and prompting the consolidation of this, the privatization of that, and, in the latest wave, the regionalization of almost everything else. Franklin County is sharing inspectional services, communities on the North Shore are preparing to regionalize their 911 operations, and my own community of Chelsea is entering into a planning exercise with neighboring Revere and Winthrop to envision a North Suffolk Service District that could result in the sharing of public health, information technology, public works, and more.

Austerity may sound great to those who wish to limit the size of local government by limiting its locally generated revenues. For those communities not content with such a fate, Prop. 2½ overrides exist as a way of charting a new course.

A Prop. 2½ override is virtually a non-starter in cities, where budget pressures are often the most acute.Unfortunately, that potential plot twist may only postpone the inevitable in a city or town, if it is any help at all. Of the roughly 1,200 override questions placed before voters in the last decade, only five of those questions were in a city — actually two cities, Brockton and Northampton. Of those five questions, only one was adopted in Northampton. The lesson here is that a Prop. 2½ override is virtually a non-starter in cities, where budget pressures are often the most acute but less affluent residents cannot see their way to digging deeper to save the very services needed to improve their quality of life. Thus, the Chelseas, Springfields, and Lawrences of Massachusetts go into some form of state control, while other cities teeter precariously. (The cities envy their more affluent sister towns — where overrides are, in fact, a reliable budget balancing method. Concord, for example, passed 19 out of 21 override measures this past decade, raising an additional $9 million in annual revenues.)

In a Shakespearean tragedy, the pain and suffering of the protagonist ends in his/her own demise. Will the pain and suffering caused by Prop. 2½ cause municipalities a similar end? It is becoming increasingly difficult to think otherwise.

Consider that since the adoption of Prop. 2½, inflation has outpaced the 2.5 percent property tax increase allowance for existing properties in 22 of 29 years, with the average annual inflation for the period at 3.9 percent. Yes, the state deserves a great deal of credit for significant increases in school aid; however, non-school local aid has plummeted to levels not seen since the mid-1980s. And while Prop. 2½ limits revenues, it fails to provide similar controls on expenditures, leaving municipalities vulnerable to skyrocketing health insurance costs (up 100 percent from 2000 through 2009 in Chelsea). While it’s hard to imagine the revenue picture getting much better, it’s getting increasingly difficult to squeeze out more savings after 30 years of belt tightening.

Fortunately, Shakespeare has not written this saga. To ensure, therefore, that the municipal finance story has a satisfactory continuation — which, in this case, would be the continued vitality of both Prop. 2½ and the municipalities who remain under its control — public policymakers need to re-write the next act.

Meaningful health insurance and pension reforms need to be adopted so that employees and retirees are treated fairly and taxpayers are not overburdened with the cost. Regionalism teams should be established to nurture and expedite collaborations among potential municipal partners. A new commitment to state aid needs to be adopted. Triggers should be established for those periods when inflation exceeds 2.5 percent, in order to allow for property tax growth to reflect what is happening in the economy.

Perhaps, after 30 years, a single Prop. 2½ recalibration needs to also take place. That recalibration would mean establishing a new floor upon which the annual 2.5 percent cap in the growth of revenues would be based. Such an action would address a major shortcoming of Prop. 2½, that being that property tax increases have not kept pace with property value increases.

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For example, Lowell, after working to successfully rejuvenate its community, saw property values soar 157 percent in the last decade, which was about 25 percent higher than the statewide average. Yet the city saw its property tax revenues increase by only 54 percent, about 14 percent lower than the statewide average. By recalibrating the ratio of property taxes to property value as originally established by Prop. 2½, communities that helped create so much additional value for property owners would be rewarded with a more commensurate tax benefit.

Macbeth eventually realizes his misguided decisions have sealed his ultimate fate. His death, though, need not be the precursor for Prop. 2½ if the kingdom under its control can help modify its course so that further good may come of it.

Jay Ash is the city manager in Chelsea. He is also a member of the MassINC board.