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| Photo by Towfiqu barbhuiya on Unsplash |
While rising property tax bills are not unusual in the Bay State, the rate at which these bills are increasing is notable. For example, the average yearly percentage by which single-family tax bills increased for fiscal years 2019, 2020, and 2021 was 3.3%; for fiscal years 2022, 2023, and 2024, the average percentage increase was 5.1%.
A big reason for the increase in single-family tax bills can be traced to the rise in the value of the total number of Massachusetts parcels, which grew to $957,687,668,022 in FY2024 from $605,611,068,931 in FY2021–an increase of 58%. By comparison, values increased by 13% from FY 2017 to FY2020.
Another factor is that the number of parcels included in the calculations grew to 1,433,549 in FY2022 from 1,295,067 in FY2021. This change may have occurred because communities with a residential exemption or senior means-tested exemption in place were excluded from the formula until 2022.
What fueled this surge in property values? Blame the COVID-19 pandemic.
Pandemic-Induced Migration Changed the Housing Market
The COVID-19 pandemic initiated several changes that impacted the housing market:
Employees gained the ability to work remotely;
The Federal Reserve cut interest rates in March 2020, causing mortgage rates to drop;
Homebuyers’ yearning for more space and a lower cost of living.
As people moved to smaller cities, suburbs, and rural areas, home prices in these places began to climb. The interactive map embedded in this article from August 2021 shows that many small towns in western Massachusetts saw single-family home prices skyrocket between 2019 and 2021. While Shutesbury’s median price did not rise significantly, neighboring towns of similar population size saw their prices jump.
Median Home Prices by Town
Source: WBUR.org: Hot Housing Market Shows No Sign of Cooling Down in Massachusetts
While some areas have seen bigger sales price increases than others, the result is an upward trend in prices statewide. The Massachusetts Association of Realtors produces monthly market reports that highlight the change in the median single-family price since 2019. Here are the year-over-year reports for the past five years.
There is some evidence that home prices are moderating in our state’s most expensive cities and towns, though that is not the case in other, formerly more affordable, communities.
The Effect of Rising Real Estate Values on Tax Rates
An increase in property values doesn’t necessarily translate into a higher tax bill since tax rates fall when values rise. Over time property tax bills tend to trend upwards, though not in lockstep with increasing values.
In Massachusetts, Proposition 2 ½ restricts the amount municipalities can tax property owners each year. Communities take the total value of real and personal property and multiply it by 2 ½ % to produce the levy ceiling, the maximum tax that can be levied that year. Municipalities usually do not tax property owners up to the levy ceiling. The annual levy limit is calculated by adding together the previous year’s levy limit, the product of multiplying said prior year's levy limit by 2 ½ %, new growth, and any applicable overrides. The actual levy can be equal to or less than the levy limit; it cannot exceed the levy limit.
Tax rates are set based on the expense budget approved by the community. The amount needed to fund the budget is divided by the total property value to determine the tax rate. When property values go up, the tax rate goes down, and vice versa.
When city and town budgets go up, tax bills increase. The inflation brought on by the pandemic increased costs for household and government budgets alike. Though annual inflation rates have dropped from their highs of 7% and 6.5% in 2021 and 2022, respectively, cumulative inflation from early 2021 to January 2024 is estimated at 18%.
For communities that rely heavily on property taxes to fund local government, there is little doubt that the average tax bill will continue to climb. For communities like Shutesbury, Annual Town Meeting (April 27) offers a chance to weigh in and vote on the town’s budget. I hope to see you there!
* In this case, a fiscal year starts July 1 of the prior year and ends June 30 of the year referenced after the abbreviation FY. Therefore, FY2024 refers to the time from July 1, 2023 through June 30, 2024.
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