Primer on overrides and debt exclusions

Mayor Ruthanne Fuller has proposed a tax override and two debt exclusions, each of which, if approved by voters, will increase Newton’s property taxes to fund the purposes associated with each. (The Mayor also proposed exemptions to mitigate the effects of these tax increases on economically vulnerable taxpayers.) Newton voters will vote on these proposals in a referendum on March 14. The City has provided information on an Override 2023 web page.

Fig City News will report on the Mayor’s proposals in the coming weeks. For now, here’s an introduction to two kinds of voter-approved tax increases: overrides and debt exclusions.

In 1982, Massachusetts voters passed Proposition 2.5, which limits the annual growth of the amount of property taxes that each municipality can levy in a year (i.e., the municipality’s levy limit). Personal and real property taxes are the largest source of revenue for local governments, so Proposition 2.5 has had a significant impact on local government budgeting and spending.

Each year under Proposition 2.5, a municipality’s levy limit is calculated as:

    [Last year’s levy limit, increased by 2.5%]
+ [New Growth, which reflects increases in the tax base due to new development]
+ [Any override approved by the municipality’s voters that year]

(New Growth is calculated by applying last year’s tax rate to the total increase in assessed value of property in the municipality due to new development.)

An override is a total dollar amount that the voters in the municipality may approve as an increase to the levy limit. Because an override increases the levy limit, it represents a permanent increase that continues in future years. Thus an override is suitable for funding recurring annual expenditures, such as the hiring of additional employees. It may also be used for capital expenses.

A debt exclusion also increases property taxes, but not on a permanent basis. It is a temporary increase in the tax levy to finance the borrowing needed for a specific capital expenditure (i.e., to construct or acquire public infrastructure or physical assets). A debt exclusion does not increase the levy limit. The amount of annual debt service for the borrowing authorized by the voters for the capital project is added above the levy limit to determine the total amount of taxes that can be levied in a year:

   [total taxes levied] = [levy limit, increased by any override] + [debt exclusions]

The impact of a debt exclusion on taxes remains constant for the duration of the debt service payments (for example, bonding for 20 or 30 years) and then stops when the debt is retired. This makes debt exclusions well-designed for funding one-time capital expenditures, such as the building or renovation of a school.

The tax increases resulting from both overrides and debt exclusions are distributed among taxpayers in proportion to the assessed values of their properties, the same way that the overall tax burden is shared. First, the City Council allocates the burden between residential and commercial sectors, as it did in November. Then the tax burden for each sector is allocated in proportion to assessed values.

Proposition 2.5 ensures that the total taxes for the municipality increase by no more than 2.5% annually (unless overrides and/or debt exclusions are approved by voters). The law applies in the aggregate and does not limit the annual increase for any particular property. The portion of the tax that is levied on any particular property may change due to changes in relative assessed values caused by new development.