Economics Tax & Budget
May 24th, 2010 3 Minute Read Report by Josh Barro

Do Property-Tax Caps Work? Lessons for New Jersey from Massachusetts

New Jersey is considering a tax reform called “Cap 2.5,” under which a municipality’s tax levy on existing property could not grow more than 2.5 percent in any year, unless its voters pass a referendum allowing a greater increase. This reform is similar to Massachusetts’s Proposition 2.5, which that state adopted in 1980.

New Jersey lawmakers may therefore be interested in giving serious consideration to Massachusetts’s experience: Did the reform succeed in controlling growth in property taxes? Were property-tax savings merely offset by increases in other taxes? And given that education is by far the largest component of local expenditure, how has the reform affected educational performance in Massachusetts?

Overall, Proposition 2.5 has succeeded in restraining growth of property-tax collections, total tax collections, and per-pupil education spending in Massachusetts. These fiscal successes have not come at the expense of the state’s educational outcomes, which are the nation’s best, consistently outperforming—or at least tying—New Jersey’s results on national school exams. Massachusetts’s advantage persists even within certain traditionally disadvantaged demographic groups.

Massachusetts’s experience suggests that New Jersey, by adopting a similar reform, could significantly restrain tax growth without hurting educational outcomes. The Bay State has shown that it is not necessary to be the national leader in school spending to be the national leader in school outcomes.

The findings of the report are:

  • In Massachusetts, Proposition 2.5 has been effective in controlling growth in property taxes. Real-dollar property-tax growth from 1980 to 2007 was just 22 percent in Massachusetts. It was 68 percent nationwide and 102 percent in New Jersey.
  • Tax collections in Massachusetts from other sources rose faster than the national average over the same period, as did state aid to localities. However, these increases did not fully compensate for the slower growth of property-tax revenues. Overall growth in state and local taxes was 58 percent in Massachusetts, while it was 70 percent nationally and 108 percent in New Jersey. As a result, New Jersey went from being the state with the tenth-highest state and local tax burden to being the state with the highest burden. In the same period, Massachusetts fell from second to twenty-third.
  • Since 1980, spending per pupil grew significantly more slowly in Massachusetts than in New Jersey or the country as a whole. In 1980, the two states had nearly equal per-pupil spending; but by 2007, New Jersey was outspending Massachusetts by 26 percent. New Jersey’s spending of $16,163 per student was the highest in the country that year, according to the U.S. Department of Education.
  • Massachusetts’s lower spending levels cannot be explained by a lesser need to serve hard-to-teach students. Even school systems in that state with similar percentages of students who were not proficient in English, or who were from low-income families, spent thousands of dollars less than their counterparts in New Jersey.
  • Despite their lower spending levels, Massachusetts’s public schools are the country’s clear top performers, as measured by National Assessment of Educational Progress (NAEP) exams administered by the U.S. Department of Education. In 2009, Massachusetts outperformed New Jersey in both reading and math in grades four and eight (though for grade eight, the gap in reading performance is within the margin of error).
  • Massachusetts’s stronger NAEP performance is not explained by favorable demographics. Within most demographic groups, students in Massachusetts achieved higher average NAEP scores than their counterparts in New Jersey. Hispanics and Asians/Pacific Islanders were a notable exception. Massachusetts students eligible for subsidized lunch or who were English-language learners also matched or outperformed their counterparts in New Jersey on the NAEP exams, despite lower spending in districts with high concentrations of such students.



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