Three Types of Property Tax Levy Limits: Boise, Brownsville, and Boston
Property tax reform and relief is a major theme across the country, and levy limits are the best approach to long-term property tax limitation. But no two systems are exactly identical, and some of the variations are surprising, including different approaches to new construction. With that in mind, I’d like to introduce a new typology of property tax levy limits: Boise, Brownsville, and Boston.
Levy limits cap the annual increase in property tax collections across a jurisdiction, rolling back rates (mill levies) to keep collections in check as values rise. It is generally agreed that levy limits should roll back rates based on the increase in value of existing properties, whereas new property should be outside the cap, since new businesses and a larger population create new costs for localities. Population or business growth shouldn’t reduce per capita collections. But while, with one partial exception, all states with levy limits concur with that reasoning, they don’t agree on how to implement it—and the differences matter.
Boise, Brownsville, and Boston each represent a structural approach to new construction under levy limit regimes. Boise stands for Idaho’s unique design, under which revenues from new construction can count toward the cap (though in real-world Idaho, only under unusual circumstances). Brownsville stands for a Texas system under which new construction is excluded from the allowable growth calculation. And Boston stands for Massachusetts’ system under Proposition 2 ½, under which the value of new construction is added to allowable growth.
In each case, the type only refers to the broad mechanism, not the details. Idaho has two caps, and the one that includes the value of new construction has an 8% growth factor, making the restriction far less stringent than it appears at first glance. The strict design of Texas’s cap is diluted by a generous 3.5% growth cap. And Massachusetts’ limitation, though “leaky” in design, has a 2.5% cap with no inflation adjustment. Reality is nuanced. But a typological use of these jurisdictions helps explain the three basic ways in which levy limits can handle new construction.
Imagine a community with $100 million in housing stock and a tax rate of 10 mills (1%), generating $1 million in property tax revenue in the first year. With a 2% levy limit, if there were no new construction and the value of existing properties rose 5% to $105 million, the levy limit would cap the increase in tax liability at $1.02 million by rolling back the mill levy to 9.71 mills.
Now imagine there’s also $5 million in new construction, and consider how levy limits work under the Boise, Brownsville, and Boston systems.
If new construction is included in the cap (the “Boise system”), then all $110 million in housing can only raise $1.02 million in revenue, forcing the mill levy to 9.27. The existing properties, which paid $1 million in taxes while valued at $100 million, pay $974,000 in tax while valued at $105 million. Total tax collections are $1,020,000, the same as if there had been no new construction.
If new construction is excluded from the cap (the “Brownsville system”), then the rollback is the same as if there were no new construction: to 9.71 percent. The new construction is disregarded for purposes of calculating the levy limit, and the new rate is applied to both old and new property. The existing properties, which paid $1 million in taxes while valued at $100 million, pay $1,020,000 when valued at $105 million. Total tax collections on old and new property are $1,068,571.
Finally, if new construction is added to the cap (the “Boston system”), then the allowable increase in collections is the sum of (a) last year’s collections plus 2% and (b) the value of new construction times last year’s rate. Under a 2% growth cap with an initial rate of 10 mills, therefore, subsequent year collections can be $1,020,000 (existing property + 2%) + $50,000 ($5 million in new property times last year’s rate) = $1,070,000. The rollback is calculated against this amount, yielding a new rate of about 9.73 mills. The existing properties, which paid $1 million in taxes while valued at $100 million, pay $1,021,364—an increase of almost 2.14% despite a 2% cap.
Here’s what that looks like:
This design choice is only one of many important considerations in designing levy limits. Policymakers must also decide on the allowable growth rate (and whether to incorporate an inflation adjustment, ignored in the example above for simplicity’s sake) and determine what spending obligations, if any, are outside the cap, among other considerations. But the distinction highlighted here is important yet little-noted. It seems quite probable that lawmakers in states with what I’ve called the Boston system (new property added to the cap) are unaware of the Brownsville system (excluded from the cap), and vice versa.
As policymakers consider the adoption of levy limits in new states, they should (at least for this) think Brownsville, not Boston—and certainly not Boise.
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