School Finance
Heading into the 2005 legislative session, many Texas school districts were strapped for cash because state law
wouldn’t allow them to raise any more funds,
at least not through local property taxes. State law caps the amount that districts may tax property owners at
$1.50 per $100 of property value. By 2005, about 80 percent of districts were at or near that cap. Although
recent Legislatures have increased the amount the state chips in for public education, the total cost has
increased at a faster rate due to factors such as population growth. So, the state’s share of the bill has
steadily decreased, a situation that has placed an
increasingly heavy burden on districts.
Another important factor in some districts’ financial struggle is the provision of the Texas Education Code
that gives the school finance system its nickname of "Robin Hood." Property-rich districts must send a portion
of their tax revenues to other districts or to the state to be reallocated to property-poor school districts, a
process called recapture.
School funding system found unconstitutional
In October 2004, deliberations began on a lawsuit filed jointly by several school districts that challenged
the constitutionality of the school funding system. Presiding Judge John Dietz eventually ruled in favor of the
plaintiffs and deemed the system unconstitutional because the $1.50 cap on local property taxes removes all
meaningful discretion for districts to fund their schools. Dietz also ruled that the current system is
unconstitutional because it does not provide enough funding for schools to provide the “adequate” education
required by the Texas Constitution.
In November of 2005, the Texas Supreme Court partially overturned Dietz’s ruling. The
Supreme Court maintained that the school funding system is unconstitutional because it creates an ad valorem
statewide property tax, but the court did not uphold the rulings on “adequacy” issues. The Supreme Court gave a
new deadline of June 1, 2006, for the Legislature to address the constitutional violations or else face school
closures. Even before the Supreme Court ruling, the Legislature had dedicated several regular and special
sessions to this issue. However, legislation attempting to address this issue wasn’t passed until the third
special session of the 79th Legislature in 2006.
Property tax reduction
Because the Supreme Court ruling focused on property taxes, the Legislature decided the best way to deal with
this issue was to reduce property taxes and restore “meaningful discretion” for school districts in setting tax
rates.
House Bill (HB) 1 dedicated $2.1 billion to reducing school district maintenance and operations (m&o) tax
rates by 17 cents in the 2006-07 school year. The new rate was 11.33 percent lower than previous
rates for districts at the $1.50 cap, or $1.33 per $100 of assessed property value. Facilities and local
enrichment taxes were added to the new m&o tax rate. HB 1 also required the 80th Legislature to further
reduce m&o tax rates to $1.00 per $100 of assessed property value, for the
next biennium. In 2007-08, school boards may increase tax rates 4 cents without a public vote to access a new
enrichment tier of funding; they may access another 2 cents at the higher yields in 2008-09. The new tier does
not require recapture from property-wealthy districts. It also increases the amount of state money for
property-poor districts to equal the amount of yield per penny in Austin ISD, a district in the 94th percentile
of property wealth.
HB 1 also appropriated $1.45 billion for districts to use for teacher pay raises, a teacher
pay-for-performance program, a new high school allotment, and state equalization aid for enrichment taxes. There
are many other smaller programs in the bill requiring TEA to hire private contractors for training,
accountability and best practices research to regulate district business practices.
The total expenditure in HB 1, $3.825 billion, came from the surplus in the general revenue fund.
The Legislature also passed several measures implementing components of Gov. Rick Perry’s tax plan:
- HB 3 created a new business margins tax to replace the state’s franchise tax; the new tax applies
to more businesses.
- HB 4 raised sales taxes on used cars by requiring buyers to pay taxes based on the Blue Book value of the car
rather than the purchase price.
- HB 5 raised taxes on tobacco products.
- HB 2 dedicated all additional revenue raised by these changes to future property tax reduction.
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