What's it all about? Warning: Math involved!

The February issue of SoCO magazine is on newsstands and has an article about Dartmouth’s fiscal woes. In it, Paul Bergman, our Director of Assessing, Greg Lynam of the Finance Committee and two of our Select Board members, Diane Gilbert and Joe Michaud, talk about the tax levy, tax classification and overrides. Mr. Lynam is quoted saying that nothing has changed in town spending since the failure of the override last year. Not good news.
I think that perhaps my readers would like a better explanation of how the tax rate and tax levy are set and how tax classification, overrides, and capital exclusions work. My posts on how the town and school budgets are developed and approved can be found here (town) and here (school)
The tax levy, the tax rate, and tax classification are related. The tax levy is used to calculate the tax rate. The tax classification changes the tax rates for residences and businesses. A single tax rate is one where both residences and businesses are taxed at the same rate. A tax classification system allows residences and businesses to be taxed at different rates.
TAX LEVY
The tax levy is the dollar amount that can be assessed in real estate and personal property taxes by the town for a given year. The levy amount is limited statue and the state commissioner of revenue provides this number to the town. The amount of increase in the tax levy is limited to 2-1/2% per year. (e.g. If last year’s levy amount was $10,000,000, the most that this years levy can be is $10,250,000) Applicable MGL here. The levy is also increased by new growth in the town. The new growth amount is the net increase, due to building, in the assessed value of property times the tax rate (e.g. Construction of new homes and businesses resulted in an increase valuation of those properties of $10,000,000 and the tax rate is $10 per thousand of assessed value. The new growth amount would be 10,000 X $10 = $100,000) Combining the 2-1/2% and the new growth figures from these two examples, the new levy amount would be $10,350,000. Towns always increase their levy by the maximum 2-1/2%. They don’t have to, but they do.
TAX RATE
The tax rate is determined by dividing the total assessed value of property in the town by the tax levy. Using the tax levy amount from above of $10, 350,000 and an assessed value of property of $1,000,000,000. The tax rate would be set to ($10,350,000 divided by $1,000,000,000 or) $10.35 per thousand of assessed value. Now suppose that due to increased valuation, the assessed value was not $1,000,000,000 but $2,000,000,000. The tax rate would then have been set to (10,350,000 divided by $2,000,000,000 or) $5.17 per thousand of assessed value. Note that the amount collected, the tax levy, would be the same. The tax levy cannot be more than 2-1/2% plus new growth. So increased property valuation lowers the tax rate but doesn’t change the tax levy. The tax rate is set each year by vote of the Select Board after receiving the report of the assessor. MGL here.
TAX CLASSIFICATION
Tax classification, or split tax rates, allows the town to assess residence and business properties at different tax rates. Adopting a split rate plan does not change the tax levy, it only changes the proportion of the levy paid by each class. The Select Board must vote on whether to have a split rate and the amount of the split every year after hearing the assessors report.
The math for an example follows;
Let’s use our example above of a tax levy of $10,350,000 and a valuation of $1,000,000,000 and a base tax rate of $10.35 per thousand. Also assume, the business property valuation was 20% of the $1,000,000,000 total valuation or $200,000,000. In a single rate plan, residents would pay $8,280,000 (80%) of the levy and business would pay $2,070,000 (20%) of the levy. The total levy is still $10,350,000. Both classes pay a tax rate of $10.35 per thousand. Dartmouth adopted a split tax rate where businesses are assessed at 140% of the base rate. So if we take 40% as our split rate, the new proportion of the total tax levy becomes $7,452,000 (72%) for residents and $2,898,000 (38%) for business. Now the tax rate for business becomes $14.49 per thousand and for residents is $9.135 per thousand.
OVERRIDES AND CAPITAL EXCLUSIONS
There are a couple of provisions in the law that allow the tax levy to be raised by more than 2-1/2% per year. MGL here. The first is an override which is a permanent increase in the tax levy, and the second is a capital exclusion which is a one year change in the tax levy. In order to raise property taxes more than the 2-1/2% per year allowed by law, either by override or capital exclusion, the Select Board must authorize a question to be put to the voters of the town in an election.
An override of $1 million would raise our tax levy in the example from $10,000,000 to $11,000,000. The following year levy would be raised to $11,275,000, or 102.5 times $11,000,000, and so on.
A capital exclusion of $1,000,000 would raise the tax levy to $11,000,000 but the next year, the allowable levy would be $10,250,000 or $10,000,000 times 102.5.
Bottom line is overrides are permanent tax increases and capital exclusions are one year tax increases.
Hope this is informative. I know that all these numbers make some peoples eyes roll up into their heads.
If I have made an error or got something wrong here, let me know in comments

UPDATE
I edited this post for content based on comments I received. Edits are in italics.
h/t to frankg