School quality and Massachusetts enrollment shifts in the context of tax limitations

New England Economic Review, July-August, 1998 by Katharine L. Bradbury, Karl E. Case, Christopher J. Mayer

The combination of cash buildup, low interest rates, and higher and rising incomes meant that trade-up buyers could now afford to buy into the school systems that they and their predecessors could not afford a decade earlier. And the aging of the baby boomers meant that more of them had children, implying that a greater fraction of households were interested in schools. As a result, the distribution of enrollments dramatically shifted towards the better school districts between 1990 and 1995.

Change in Local Fiscal "Rules"

Added to these demographic and economic changes in Massachusetts was the property tax limitation measure, Proposition 2 1/2. Passed by voters in November 1980, it required communities in Massachusetts to reduce their property tax levies by 15 percent per year until they attained a maximum rate of 2.5 percent of the market value of property. Once those cuts had occurred, the property tax levy could not exceed the town's levy limit, which rose by only 2.5 percent per year, plus an allowance for new development, unless local voters passed an override to increase taxes more.

About two-fifths of the state's 351 cities and towns were required to make budget cuts in fiscal year 1982; all had reached the 2.5 percent rate limit by fiscal year 1984. After the initial cuts, Proposition 2 1/2 had only minor effects on local budgets from 1985 to 1990 because of three favorable factors: The Commonwealth provided sizable increases in local aid, the real estate boom led to considerable new development that increased the tax base, and school enrollment declines reduced pressures on local budgets. However, these favorable trends reversed at the end of the decade; the local economy went into a nose-dive, the state cut back on aid, and the baby boom echo caused enrollments to pick up. As a result, an increasing number of communities bumped up against their levy limits.(8)

Thus, in the early 1990s, as baby-boomer families began to purchase trade-up homes, they may have looked not only at the school quality of each community in which they could locate but also at the degree to which each community was constrained by the growth-limit provisions of Proposition 2 1/2. Communities required by Proposition 2 1/2 to reduce their taxes might have been more attractive to families with children who preferred direct voter oversight of tax increases and who believed municipal officials were likely to overspend in the absence of such budget constraints. Alternatively, more constrained cities and towns might be less attractive because they were less able to respond to resident preferences regarding local public services, both school and nonschool.(9) Tables 7 and 8 suggest that the latter factors dominated, that is, families with children found constrained communities [TABULAR DATA FOR TABLE 7 OMITTED] [TABULAR DATA FOR TABLE 8 OMITTED] less attractive, on average. Communities facing greater Prop 2 1/2 property tax reductions in the early 1980s saw bigger declines in enrollment between 1980 and 1985, net of initial demographics, than communities facing no cuts. And between 1990 and 1995, communities bumping against their levy limits before the period began (fiscal year 1989) similarly saw smaller enrollment increases than less constrained communities.