Last fall, the town of Rockport in eastern Massachusetts needed money.

Town administrators wanted to fund a new solid waste program and a health maintenance organization, but they lacked the $700,000 that the projects were expected to cost. They also had to make up for substantial cuts in state funds that Gov. Michael S. Dukakis ordered last year to help close the state's budget deficit.

Unable to ask the financially strapped state for the extra cash, Rockport officials turned to the residents of the community and asked them to vote on a referendum question to override Proposition 2 1/2, the state law that limits the amount a city or town can increase the property tax levy.

The community voted, Prop 2 1/2 was overridden for one year, and Rockport raised the money it needed through the increased property tax.

But with the rising costs of community services and little additional help expected from the state, the override question will likely show up again on next year's ballot.

"There is no question that further overrides will be necessary," says Rockport treasurer Bill Parsons, who cited the last year's move as a final resort to raise essential public funds. The question, Parsons says, is whether the town's residents will keep voting to approve the overrides.

That uncertainty has convinced Parsons and other state and local officials across Massachusetts that it is time to alter the 10 year-old tax limitation law.

Ever since Prop 2 1/2 was enacted, cities and towns relied on the state to make up for the lost tax revenue in local aid payments. But now, with the state facing a budget deficit of more than $500 million, state officials say they can no longer supply the necessary funds.

Dukakis has threatened to raise the $500 million by slashing local aid programs if the legislature--currently in a state of political paralysis--does not close the deficit by the end of the fiscal year in June.

The adminstration's budget for the next fiscal year, expected to be altered by the legislature, also calls for cuts of $100 million in the $2.8 billion local aid budget.

"The state has filled in the gap," says Paul Bockelman, executive secretary of Manchester, an eastern Massachusetts town that unsuccessfully attempted a Prop 2 1/2 override vote earlier this month. "But now that the state cash cow is dead, that money is not there anymore."

Prop 2 1/2, approved by almost 60 percent of the voters in a 1980 referendum, sets a limit on the amount of revenue a city or town can raise through property taxes and puts a cap on the annual property tax increase.

Under the law, property tax revenue for any city or town cannot exceed 2 1/2 percent of the fairmarket value of the taxable property in that city or town. It further restricts local governments from increasing the amount of revenue received from property tax by more than 2 1/2 percent a year.

Along with many local government leaders, Parsons calls the law an unrealistic restriction on municipal officials who rely on the property tax as their only means of revenue.

If tax revenue fails to keep up with inflation, Parsons says, communities are forced to reduce education budgets and cut back on basic services such as police protection and garbage pickup.