Town of Westborough Advisory Finance Committee Analysis of Levy Limit Growth Westborough s Immunity to Proposition 2 ½ Abstract Massachusetts Proposition 2 ½ was intended to limit municipal tax growth. Theoretically taxes should not increase more than 2.5% per annum with all things being equal. Over the past 16 years (FY2000 to FY2015) Westborough s average single family tax bill has increased 5.4% annually on average. Westborough has been able to increase taxes at these percentages without the need for a permanent override vote due to special accounting for personal property new growth. Personal property new growth is added to the total assessed value of the town but it is never removed despite depreciation or sale of these assets. This paper analyses this phenomenon in detail and shows how Westborough has become immune to the limiting effects of Proposition 2 ½.
Background Proposition 2 ½ In 1980 Massachusetts voters approved Proposition 2 ½. The law took effect in 1982 and had the following 2 provisions: 1. A community cannot have a tax rate greater than 2.5 percent of the total full cash value of all taxable property in the community (called the levy ceiling). 2. A community's tax levy limit (the maximum amount of taxes that may be collected for a fiscal year) cannot increase by more than 2.5 percent from the prior year, plus certain allowable increases such as new growth. Exceptions to Proposition 2 ½ Proposition 2½ established two types of voter-approved changes in taxing authority. 1. Overrides and Underrides. A levy limit override increases the amount of property tax revenue a community may raise. The result is a permanent increase in taxing authority. The purpose of the override is to provide funding for municipal expenses likely to recur or continue into the future, such as annual operating and fixed costs. Proposition 2½ also allows voters to mandate a reduction in taxing authority. A levy limit underride decreases the amount of property tax revenue a community may raise. The result is a permanent decrease in taxing authority. 2. Exclusions: An exclusion increases the amount of property tax revenue a community may raise for a limited period of time in order to fund specific projects. It does not increase the community's levy limit nor become part of the base for calculating future years' levy limits. There are 2 categories of exclusions. Debt Exclusion This is used to raise additional funds for public building, public works projects, land, and equipment acquisitions. Westborough voted a debt exclusion for new school buildings in FY2000. Capital Exclusion This is for a one-time expense such as the purchase of a fire truck. Westborough, Massachusetts Analysis of Levy Limit Growth Page 2
Valuation Classes In Massachusetts, a taxable asset falls into one of five assessment/valuation classes: 1. Residential Properties for human habitation. 2. Open Space Land maintained in an open or natural condition that contributes to the benefit and enjoyment of the public. 1 3. Commercial Properties such as retail and service businesses, agricultural, artistic and sporting venues. 4. Industrial Properties that are used for manufacturing, milling, converting, producing, processing or fabricating materials, storage facilities and public utilities. It also includes properties such as office buildings. 5. Personal Property Personal properties are furnishings and equipment that are movable. Under Massachusetts law, this category applies to certain types of companies and includes the plant and equipment used in the conduct of their business. Residential personal property, except second homes, is exempt by law. Table 1 shows the fiscal year 2015 Department of Revenue approved valuations by class, tax rate and tax levy for Westborough. Westborough uses a single tax rate for residential and business properties. The combined commercial, industrial and personal property (CIP) percentage of 35.5% ranks Westborough in the top 5 municipalities statewide in FY2015 with populations greater than 5,000 and ranks 2 nd within municipalities with single tax rates. Table 1 Westborough FY2015 Assessed Valuation and Levy by Class Assesed Taxes Raised Percent by Assessment Class Valuation (Tax Rate $18.59) Class Residential 2,217,076,983 41,215,461 64.5% Commercial 563,377,880 10,473,195 16.4% Industrial 357,670,875 6,649,102 10.4% Personal Property 298,515,520 5,549,404 8.7% Total 3,436,641,258 63,887,162 100.0% Source: Massachusetts Department of Revenue 1 Open space accounts for only.3% of the total assessment in the Commonwealth. Westborough has no properties classified and taxed as open space. In 21 of the 22 towns who do have open space properties, the tax rate is the same as the residential tax rate. In this paper open space will be combined with residential valuations. Westborough, Massachusetts Analysis of Levy Limit Growth Page 3
New Growth The concept of New Growth was included in Proposition 2 ½ to allow municipalities to add new real estate growth to their tax levy limit with the logic that new residential and non-residential growth would require additional municipal services beyond that provided by the automatic 2.5% levy limit increase. Special Characteristic of Personal Property New Growth New developments of residential, commercial and industrial real estate can be added onto the levy limit. The addition to the levy limit is based upon their valuation and the prior fiscal year s tax rate 2. Once a real estate property has been added to the levy limit it can never be added again. Personal property, however, can be added multiple times. For example, a business buys a new machine at $100,000. The tax value that machine is added onto the levy limit. If the tax rate was $15 per thousand in the prior fiscal year, then the levy limit would rise by $1,500. That addition would become a permanent part of the levy limit and would grow at 2.5% along with the rest of the levy limit. If after five years the machine was worn out, the business would buy a replacement machine. Assuming the old machine was replaced with one also costing $100,000, and assuming no increase in tax rates over the five years then another $1,500 would be added to the levy limit. The original $1,500 plus its 2.5% growth over the 5 year period would not be subtracted from the levy limit, even though the company had probably fully depreciated the machine. Personal property new growth goes into the levy limit but never comes out. The municipality can only tax the new machine at its current yearly value which of course drops each year of its use. Unlike real estate which more or less grows in value over time, personal property depreciates over time, but increases the levy limit indefinitely. This increase of the levy limit allows taxes to increase in excess 2.5% without the need for a permanent override ballot vote. This is exactly how Westborough s taxes have been able to grow without the necessity of an override. 2 The prior year s tax rate is used because the tax rate for the current fiscal year is not set until late November or early December which is 5 months into the fiscal year. Westborough, Massachusetts Analysis of Levy Limit Growth Page 4
Westborough s Personal Property New Growth Table 2 shows how personal property new growth has factored into overall new growth. As can be seen below in the row labeled Total 2000-2015 New Growth, a total valuation of $966,427,069 of personal property new growth was added, vs. a total of $524,100,667 for residential, commercial and industrial real estate. During the period illustrated, personal property new growth accounted for 65% of all new growth valuations. Table 2 Westborough New Growth FY Residential Commercial & Industrial Personal Property Total 2000 28,647,420 15,457,714 76,300,072 120,405,206 2001 33,424,014 13,513,481 30,720,391 77,657,886 2002 28,047,196 29,735,203 40,528,880 98,311,279 2003 36,296,200 30,458,800 13,444,800 80,199,800 2004 30,727,885 4,865,715 99,100,160 134,693,760 2005 28,904,158 6,775,715 166,969,770 202,649,643 2006 22,034,310 14,446,330 45,828,620 82,309,260 2007 20,590,000 6,068,600 99,556,990 126,215,590 2008 10,074,557 19,615,570 26,271,420 55,961,547 2009 11,590,601 10,006,915 63,767,490 85,365,006 2010 6,251,000 5,519,405 28,569,570 40,339,975 2011 13,951,863 1,861,830 29,386,320 45,200,013 2012 5,414,823 2,466,000 69,833,740 77,714,563 2013 6,492,901 204,100 86,853,190 93,550,191 2014 29,615,872 4,116,303 42,657,946 76,390,121 2015 40,509,886 6,416,300 46,637,710 93,563,896 Total 2000-2015 New Growth 352,572,686 171,527,981 966,427,069 1,490,527,736 Source: Office of the Assessor- Westborough Massachusetts and Massachusetts Department of Revenue Westborough, Massachusetts Analysis of Levy Limit Growth Page 5
Table 3 shows the results of new growth over time. By adding the 2000-2015 new growth valuations to the town s valuation in 1999 one would expect to see a total equal to or greater than the town s valuation in 2015. This is exactly the case for Residential and Industrial/Commercial real estate. Actually these two categories show a higher value most likely due to the effects of inflation. However, the value of personal property is almost $730 million less than expected. Although a total of $966 million was added as personal property between FY2000 and FY2015 only about $299 million of that was still on the assessors roles in FY 2015. This means that Westborough has lost almost $730 million in personal property valuations during the 16 year period listed. Nevertheless, this $730 million valuation continues to contribute to the calculation of Westborough s levy limit and per Proposition 2 ½ continues to increase at 2.5% annually. Table 3 Loss of Personal Property Valuation Commercial & FY Residential Industrial Personal Property Total 1999 Valuation 1,019,088,085 598,825,211 61,761,120 1,679,674,416 Total 2000-2015 New Growth 1999 Valuation + 2000-15 New Growth 352,572,686 171,527,981 966,427,069 1,490,527,736 1,371,660,771 770,353,192 1,028,188,189 3,170,202,152 2015 Valuations 2,217,076,983 921,048,755 298,515,520 3,436,641,258 Increase/(Decrease) in Valuation between 845,416,212 150,695,563 (729,672,669) 266,439,106 1999 and 2015 Source: Office of the Assessor- Westborough Massachusetts and Massachusetts Department of Revenue Westborough, Massachusetts Analysis of Levy Limit Growth Page 6
What would Westborough s Levy Limit be without Personal Property New Growth? To illustrate the actual dollar effect of personal property new growth, the levy limit calculations were done including (Table 4) and then excluding (Table 5) personal property new growth. The levy limits and tax levy also exclude the effect of the debt exclusion voted in FY2000. Table 4 - Levy Limit calculation including Personal Property New Growth FY Pr. Year + Amendments 2.5% New Growth Tax Dollars Levy Limit (A) ( B ) (C) (D) (A x 2.5%) (A+B+C) 1999 26,523,590 663,090 1,000,941 28,187,621 2000 28,187,621 704,691 1,880,729 30,773,041 2001 30,773,041 769,326 1,174,187 32,716,555 2002 32,716,555 817,914 1,379,307 34,913,776 2003 34,916,683 872,917 1,082,697 36,872,297 2004 36,872,297 921,807 1,788,733 39,582,837 2005 39,603,846 990,096 2,810,751 43,404,693 2006 43,404,693 1,085,117 1,182,784 45,672,594 2007 45,672,594 1,141,815 1,749,348 48,563,757 2008 48,563,757 1,214,094 764,435 50,542,286 2009 50,542,286 1,263,557 1,254,866 53,060,708 2010 53,060,708 1,326,518 625,270 55,012,496 2011 55,012,496 1,375,312 767,496 57,155,304 2012 57,155,304 1,428,883 1,417,514 60,001,701 2013 60,001,701 1,500,043 1,797,100 63,298,844 2014 63,298,844 1,582,471 1,449,120 66,330,435 2015 66,330,435 1,658,261 1,804,847 69,793,543 Source: Data derived from Office of the Assessor- Westborough Massachusetts Note in FY03 and FY05 there were amendments done to the prior year levy limit Table 5 - Levy Limit calculation excluding Personal Property New Growth FY Pr. Year + Ammendments 2.5% (A) ( B ) (A x 2.5%) New Growth Tax Dollars Levy Limit Source: Data derived from Office of the Assessor- Westborough Massachusetts (C) (D) (A+B+C) Tax Levy Levy without Debt Exclusion 1999 26,523,590 663,090 1,000,941 28,187,621 26,236,514 26,236,514 2000 28,187,621 704,691 688,922 29,581,234 29,395,838 29,255,243 2001 29,581,234 739,531 709,695 31,030,460 30,168,588 29,524,607 2002 31,030,460 775,762 810,687 32,616,909 32,237,035 30,538,895 2003 32,619,816 815,495 901,193 34,336,504 38,509,743 36,866,188 2004 34,336,504 858,413 472,683 35,667,600 42,310,241 39,577,261 2005 35,688,609 892,215 494,880 37,075,704 46,593,899 43,132,800 2006 37,075,704 926,893 524,227 38,526,823 48,589,407 45,251,430 2007 38,526,823 963,171 369,488 39,859,483 50,807,384 47,623,311 2008 39,859,483 996,487 405,567 41,261,537 53,537,543 50,539,198 2009 41,261,537 1,031,538 317,483 42,610,558 55,814,538 52,965,393 2010 42,610,558 1,065,264 182,441 43,858,263 57,603,680 54,908,438 2011 43,858,263 1,096,457 268,517 45,223,237 58,987,686 56,448,202 2012 45,223,237 1,130,581 143,746 46,497,564 61,005,858 58,618,423 2013 46,497,564 1,162,439 128,650 47,788,653 62,375,108 60,141,576 2014 47,788,653 1,194,716 639,899 49,623,268 63,198,395 61,026,751 2015 49,623,268 1,240,582 905,206 51,769,056 63,887,162 62,065,091 Westborough, Massachusetts Analysis of Levy Limit Growth Page 7
If personal property new growth is not included, Westborough s FY15 levy limit (without debt exclusion Table 5 - column D) would be $51.8 million vs. its actual limit of $69.8 million. Personal property new growth alone has increased the levy limit by 35% over the period 2000 to 2015. Westborough Levy Limit vs. Actual Tax Levy Although an increase in the levy limit does not mean an automatic increase in the tax levy per se, an historical analysis shows that the tax levy has closely tracked the actual levy limit (see Chart 1). Fortunately in the past few years strong fiscal management has slowed the rate of increase in the tax levy. This has resulted in Westborough s excess levy capacity, the difference between the levy limit and the tax levy, to rapidly increase. In 2015 Westborough s excess levy capacity reached $7.7 million. Unfortunately this excess is mostly the result of personal property new growth. Chart 1 Westborough Tax Levy compared to actual Levy Limit and Theoretical Limit without PP Source: Data derived from Office of the Assessor-Westborough Massachusetts In 2015 Westborough s tax levy was $62 million (without the debt exclusion). If personal property valuations were not included in the levy limit calculations, Westborough would need to vote $10.3 million in permanent overrides to stay within Proposition 2 ½ constraints. Westborough, Massachusetts Analysis of Levy Limit Growth Page 8
Westborough vs. Other Municipalities Westborough is not alone in a significant loss of personal property valuation. An analysis of data provided by the Department of Revenue for the period FY2002 to FY2015 shows substantial losses in many communities. Table 6 lists the top 25 municipalities in personal property valuation loss. These 25 municipalities have a combined valuation loss during this period of $14.9 billion. When the analysis is done for all 351 towns and cities the personal property valuation loss equals $29.1 billion. Table 6 Personal Property New Growth and Loss Valuation FY2002-15 Top 25 Municipalities Valuation 2002 Municipality Valuation 2002 New Growth 2003-2015 + New Growth 2003-15 Valuation 2015 Valuation Loss Boston 2,889,814,920 6,208,492,831 9,098,307,751 5,154,210,832 3,944,096,919 Cambridge 305,136,510 2,359,581,122 2,664,717,632 1,089,862,800 1,574,854,832 Plymouth 859,542,200 342,203,390 1,201,745,590 264,930,551 936,815,039 Westborough 166,994,968 818,877,726 985,872,694 298,515,520 687,357,174 Springfield 261,301,850 999,152,390 1,260,454,240 640,954,110 619,500,130 Waltham 236,955,700 743,292,310 980,248,010 380,479,990 599,768,020 Marlborough 114,680,493 673,730,528 788,411,021 244,725,590 543,685,431 Quincy 176,851,869 631,899,469 808,751,338 268,079,660 540,671,678 Woburn 150,353,400 609,066,100 759,419,500 260,365,990 499,053,510 Chelmsford 131,815,647 455,417,245 587,232,892 160,390,410 426,842,482 Lexington 118,232,550 468,928,900 587,161,450 180,027,950 407,133,500 Worcester 314,114,700 773,686,715 1,087,801,415 700,912,200 386,889,215 Salem 261,760,050 238,134,333 499,894,383 134,283,680 365,610,703 Pittsfield 177,652,960 313,773,599 491,426,559 157,166,800 334,259,759 Somerset 351,252,680 189,077,701 540,330,381 209,991,490 330,338,891 Framingham 169,394,050 374,624,226 544,018,276 223,149,421 320,868,855 Barnstable 177,638,825 342,134,555 519,773,380 212,290,440 307,482,940 Billerica 97,958,800 468,064,600 566,023,400 263,832,900 302,190,500 Andover 93,565,960 440,433,569 533,999,529 246,548,798 287,450,731 Norwood 64,455,350 331,393,970 395,849,320 121,408,140 274,441,180 Mansfield 43,081,240 374,395,950 417,477,190 152,601,890 264,875,300 Taunton 49,455,362 370,098,832 419,554,194 155,919,810 263,634,384 Burlington 119,300,030 276,620,724 395,920,754 152,236,170 243,684,584 Dedham 67,748,480 281,667,022 349,415,502 112,195,780 237,219,722 Franklin 65,093,800 309,544,346 374,638,146 139,805,150 234,832,996 Total 7,464,152,394 19,394,292,153 26,858,444,547 11,924,886,072 14,933,558,475 Source: Massachusetts Department of Revenue Westborough, Massachusetts Analysis of Levy Limit Growth Page 9
Summary and Possible Remedies Because of the way personal property new growth is handled within proposition 2 ½, and Westborough s high percentage of Commercial/Industrial tax base and its affiliated personal property, the town s levy limit has grown well in excess of the spirit of proposition 2 ½. Although levy limit growth by itself does not equate with higher municipal spending, it does allow spending growth to be authorized purely through the actions of Town Meeting. Unlike many other municipalities, Westborough has never gone through the discipline of a ballot override vote. There have been 4,179 override ballot questions in the Commonwealth between FY1989 and FY2014. Of those, only 1,636 or 39.1% passed. It is not unreasonable to imagine that Westborough s tax burden would be significantly lower if our levy limit increases had required ballot question overrides. It should be noted that the calculation of the town s tax levy is all in accordance with Massachusetts statutes. This leaves the town with a few possibilities if it desires to deal with the personal property phenomenon. Petition the legislature to address the treatment of personal property new growth by incorporating a depreciation mechanism. This would allow new growth to be added as well as subtracted based on depreciation. Petition the legislature to not use personal property new growth in calculating a municipality s levy limit. Vote an underride (and consider others annually) to offset the unintended levy-limit impact of Westborough s personal property new growth. Because an excess levy capacity provides more flexibility and headroom when preparing budgets it is understandable that municipal officials would be reluctant to support the above remedies since the result might require politically difficult override ballot questions. Westborough, Massachusetts Analysis of Levy Limit Growth Page 10