Finance and Economics Discussion Series (FEDS)
January 1998
Restraining the Leviathan: Property Tax Limitation in Massachusetts
David M. Cutler, Douglas W. Elmendorf, and Richard Zeckhauser
Abstract:
Proposition 2-1/2, a ballot initiative approved by Massachusetts voters in 1980, sharply reduced local property taxes and restricted their future growth. We examine the effects of Proposition 2-1/2 on municipal finances and assess voter satisfaction with these effects. We find that Proposition 2-1/2 had a smaller impact on local revenues and spending than expected; amendments to the law and a strong economy combined to boost both property tax revenue and state aid above forecasted amounts. Proposition 2-1/2 did reduce local revenues substantially during the recession of the early 1990s. There were two reasons for voter discontent with the pre- Proposition 2-1/2 financing system: agency losses from inability to monitor government were perceived to be high, and individuals viewed government as inefficient because their own tax burden was high. Through override votes, voters approved substantial amounts of taxes above the limits imposed by the Proposition.
Full paper (431 KB Postscript)Keywords: Property tax limits, agency problems
PDF: Full Paper
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