School Finance: The Elephant in the Property Tax Equation

Surging property taxes are a direct result of the state’s school finance system, not cities and counties. Local property taxpayers are picking up billions more for public schools while the state spends billions less. And it’s by design.

By Joel Nihlean

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Tarrant County Judge Glenn Whitley made waves talking about the state’s role in rising property taxes earlier this year. Armed with hard numbers and hard truths about the state’s school finance system, he put a renewed focus on how Texas funds education. 

Whitley’s message is simple: surging property taxes are a direct result of the state’s school finance system, not cities and counties. Local property taxpayers are picking up billions more for public schools while the state spends billions less. And it’s by design.

“In the last session of the Legislature, the House tried to put more money into public education. The Senate tried to reduce it by about $2.5 billion. But the budget that they ultimately ended up passing was based upon the assumption that property taxes would go up 14 percent in fiscal year ‘18 and ’19,” Whitely said at TAC’s 2018 Legislative Conference in August.

Public education is the most significant part of the property tax bill, and it keeps getting bigger. Rising property values have allowed the state to reduce its share of funding. The amount property taxpayers pay to fund schools, though, is growing. 

In 2019, according to the Legislative Budget Board’s (LBB) “Fiscal Size-Up: 2018-19 Biennium,” the state contribution will drop to 35 percent. Federal aid from several agencies covers another 9.5 percent. Local property taxpayers will pick up the remaining 55.5 percent.

As recently as 2008, the state and local contributions to fund K-12 education were closer to a 50-50 split. The state put in 44.9 percent and local property taxpayers covered 44.8 percent. It came to roughly $18 billion apiece. The feds covered the rest.

Since that time, the state’s student population has boomed — about 800,000 more kids in the last decade. The LBB estimates the state’s contribution will increase to about $19 billion in 2019. Local school districts contributions will balloon to $30 billion. It’s billions more in spending — almost entirely shouldered by property taxpayers — but that’s not the whole story.

“Legislators will say, ‘Overall, we’re spending more on education than we ever have,’” said Dr. Catherine Clark, a school finance expert who joined Whitley at TAC’s Legislative Conference to help attendees understand the system. “We’re adding 80,000 students every year. Of course, we’re spending more. But, on a per-student basis, we’re not.”

The LBB projects per-student state funding in 2019 to drop from $9,845 in 2010 to $9,226 after adjusting for inflation. That’s 6.3 percent less per student. The federal share has also dropped from 16.4 percent of the total to just 9.5 percent in 2019.

The Solution at the Center of the Problem

The current property tax imbalance was set in motion by a cobbled-together and complicated set of policies and funding formulas, commonly known as Robin Hood, plus a booming real estate market. In some ways, Texas is a victim of its own success.

The Robin Hood program was a response to the 1993 Texas Supreme Court ruling in Edgewood Independent School District v. Kirby on school finance. Before the ruling, the wealthiest school districts in Texas were able to raise as much as nine times the funding as the lowest wealth districts, according to the Center for Public Policy Priorities.

To smooth out funding disparities, the Legislature told high wealth school districts which were able to raise more property tax revenue — often with far lower rates — that they would need to share that excess wealth. Texas decided to “recapture” property tax revenue from what was deemed property-wealthy districts and distribute it to property-poor districts. 

The state provides options for spreading the wealth around. Districts can consolidate with another school district, detach property from their district, create a regional taxing jurisdiction, choose to fund programs of another low-wealth school district, or they can send the money off to the Texas Education Agency (TEA).

Most of the options are complicated and unpopular according to Clark, who has nearly 40 years of experience in education policy and research, including work for Texas Association of School Boards (TASB) and time as the director of research at the Charles A. Dana Center at the University of Texas at Austin.
“In practical effect, they write a check to the state,” she said.

The state takes into account many factors when determining how much funding each school district needs, and by extension, when they have too much. The ultimate goal of the calculations is to make sure that a student’s educational opportunities aren’t determined by where they grow up.

It starts with a funding floor, known as the foundation. TEA sets a guaranteed funding level per student so that they meet state academic standards. A formula weighs various student and district needs.  A few of the factors that affect the final funding numbers include the number of English language learners, gifted and talented students and economically disadvantaged students, as well as district size and differing costs of labor.

If a district cannot raise enough property tax revenue to meet their foundation level, the state steps in to supply the rest. This funding increasingly comes from other property taxpayers around the state.

“The system the state uses to fund school districts and equalize funding are based on the property that school districts have. When property values are higher, state aid is lower. When property values are lower, state aid is higher. That’s the basic mechanism,” Clark said. “And that is what has led us to an enormous problem, both in perception and reality.”

When Robin Hood was first enacted, 33 school districts were subject to the program, and it brought in about $130 million. Clark said the state is supposed to study the cost of educating students and various other elements of school funding every other year, and report the findings to the Legislature to adjust funding formulas. She says this hasn’t happened in about 12 years. Since then, the number of recapture districts swelled.

Today, more than 400 school districts are subject to recapture. The state expects roughly $5 billion to come back to the state through the program in 2018.

The plan has been in and out of court since implementation, once even being declared an unconstitutional state property tax in 2005.

But the Robin Hood plan works — sort of.

In the 2015 Morath v. Texas Taxpayer & Student Fairness Coalition case, the Texas Supreme Court noted that Clark had concluded the gap between rich and poor had closed significantly by the 2013-14 school year.

According to Clark’s calculations, the wealthiest districts averaged $6,708 per student, compared to $5,801 for property-poor districts — a ratio of 1.16.

“When your constituents tell you, and tell school boards, that property taxes are too high, it’s not because the system isn’t working,” Clark said. “It’s because Texas has outgrown the system and maybe we need something new.” 

The Property Wealth Paradox

Many districts now classified as property wealthy do not have wealthy residents. Austin Independent School District (AISD) is the largest single contributor to the recapture program. It has sent more than $3 billion in property tax dollars to the state since 1994. According to the Texas Tribune’s Texas Public Schools Explorer database, 53.3 percent of AISD students are economically disadvantaged, and nearly a third are English language learners.

“We’ve all heard that just throwing money at this is not the answer,” Whitley said. The numbers, Whitley believes, tell a more complicated story.

Six of the top 10 states by average funding per student are also ranked as having top National Assessment of Educational Progress (NAEP) performance scores. Texas is ranked 42 in spending, and 31 in NAEP performance.

“As a Texan, I’m not sure I’m happy with either number, but let’s give teachers credit for the fact that at number 42 in funding, they’re performing at 31."

About two-thirds of the top 20 states by spending on students are also in the top 20 in student performance, according to Whitley.

“It may not be directly determined based on what you spend, but that has at least some effect on it,” said Whitley. “There’s something there.”

According to the National Education Association (NEA), Texas spent about $2,300 less per student than the national average in the 2017-18 school year.

Per-student funding isn’t the only way money shows up as a factor in student performance. Sixty percent of the students in the average school district in Texas are economically disadvantaged, and 20 percent are English language learners.

The 30 top performing school districts in Texas are spending about $550 more per year on each student than the average school district. These districts also have low numbers of economically disadvantaged students. None are more than 20 percent economically disadvantaged, according to Whitley.

Whitley pointed to a column by Texas economist Dr. Ray Perryman where he praised Texas for high rankings in CNBC’s state-by-state measures of competitiveness. Texas was top in infrastructure and economy, he said, but 31 in quality of life and 37 in education.

“We’re not going to continue to be number one in attracting businesses if we don’t find a way to address how we’re going to educate economically disadvantaged kids. That’s where the wheels begin to come off,” said Whitley.

Following the Money

It’s important to note that the local property tax dollars the state is recapturing don’t supplement state dollars for school funding, they supplant them. According to Eva DeLuna at the Center for Public Policy Priorities, the state’s contribution — once nearly half — could be as little as 32 percent by 2021.

As more money from recapture comes in, less state money goes out. When Texans living in school districts subject to recapture send local property tax dollars to the state, those dollars may end up being spent on programs that have nothing to do with education.

“People say, ‘Okay, $4,000 for my property taxes. Well, it’s for the kids,’” Clark said. “Well, it may not be for the kids in their district. It may not be for kids at all. Those recaptured dollars go to the state as general fund money and replace what would have otherwise been state aid.”

Legislators get an estimate of how much money will come into the state through recapture as they prepare the state’s budget. The rising property values that drive recapture have been a windfall to the state.

“The bottom line is that they’re not putting as much money in. As they’ve had to put less money into schools, they’ve put it in the Rainy Day Fund, then turned around and pointed fingers at [local governments], and said ‘they’re raising the property taxes.’”

As school property taxes go up, property taxes from the local level are paying for more and more of the maintenance and operations (M&O) costs. According to Whitley, if the money adding up in the Rainy Day Fund had instead been used to offset M&O, it would have reduced those costs by 15 percent per year from 2016-2019.

In early 2018, Whitley started pointing to the school finance system as the elephant in the room. It was the pressure behind rising property tax bills and rising tax angst. He hammered on it at nearly every speaking engagement he had.

It earned him news coverage across the state and raised the ire of his local legislative delegation. A state senator even walked out midway through his talks. One headline read, “For One Republican, A Day of Truth-Telling About Texas, Schools and Taxes.”

The next week, the Tarrant County state senate delegation penned a letter to the editor of the Fort Worth Star-Telegram. In it, they wrote that Whitley told “a bald-faced lie about the state budget and local property taxes.”

“Let’s set the record straight,” they continued. “Local property tax rates are set by locally elected officials. Period.” The statement is not untrue, but not the whole story either, according to Whitley.

“After I kind of got into this and had four state senators write a letter calling me a liar, I said to myself I better learn a little bit more about this. So, I asked some CFOs of school districts why don’t you just lower the tax rate?’”

The truth is, many school districts can’t lower the tax rate and expect the state to step in and fill in the rest. If they do, the state may take money away from the school district. The state requires that districts raise a certain amount of money.

“I started talking with the school districts about their ability to lower the rate. Well, if they lower the rate, they get a double whammy. The state won’t give them as much money — they penalize them. Fort Worth ISD actually moved two pennies from debt service to M&O, so they raised more money locally and the state gave them more money because they did that.”

TEA recently sent a letter out to the school districts reminding them of their obligation: “The Texas Education Agency will ensure that all school districts are raising their required local share of the Foundation School Program before flowing Foundation School Fund payments.”

“So, if [school districts] lower your rate, they probably aren’t going to get any state funds,” said Whitley.
The policies also don’t incentivize lowering tax rates. In some cases, they incentivize raising even more local revenue.

School districts with M&O tax rate of $1.04 or more per $100 of assessed property value need voter permission to raise their rates. All but 43 of the state’s 1,020 school districts have rates of at least $1.04.

There is also a M&O cap of $1.17 per $100 of assessed property value. As of 2017, more than half of the state’s school districts were already maxed out. Many districts are at their current rates to meet their required local share of the Foundation School Program. And for those districts above $1.04 and subject to recapture, there is little incentive to lower the tax rate. On the other hand, raising it again for any reason would trigger a tax ratification election. So, there is little incentive to alter the tax rate in either direction.

State Funding Solutions and Local Decisions

Whitley says he firmly believes that the property tax debate, as some state leaders frame it, is part of a plan to do away with local decision-making authority. 

“We’re losing Speaker Straus. In my opinion, that’s what saved all of us for the last 10 years. And if we don’t take up the mantle, if we don’t start confronting our state representatives and our state senators, and tell them we’re tired of them pointing the finger at us and saying we are the problem, then we’re going to end up suffering mightily under the next session of the Legislature,” Whitley said.

He said providing real property tax relief that taxpayers will feel isn’t necessarily politically easy, but if lowering property taxes is the goal, fixing school finance is the only path forward.

“The state does need to step up. What I would suggest — instead of figuring out what the locals will contribute — the state should set their amount per student for M&O and look at some facility adjustments. Have them pay half of that, and then say to the districts, ‘now you go out and raise the other half.’ That will really leave it to the school boards to make their decisions.”

The state stepping in and bringing its contribution back up will lower taxes. That requires money. To get back to the 50-50 state and local split of 2008, where each contributed 45 percent of the cost, the state would need to find several billion dollars more in the budget on an ongoing basis.

Whitley believes a close look at tax exemptions and an expansion of the sales tax would more than cover what the state needs. With the taxation of internet sales on the horizon for Texas, an expansion of sales tax could even lead to a lower sales tax rate.

“I think we need to look at property taxes from the standpoint of what the exemptions are and if some of those need to be sunset like we do with certain commissions and agencies. I think we need to broaden the services we tax. Right now, it’s manufacturing. If we were to broaden it to include services, that doesn’t mean it needs to stay at 6.25 percent or 8.25 percent — depending on where you are — it could come down a little bit, because we’re broadening who gets a chance to pay that.”

The other benefit of the sales tax is it’s not just paid by Texans. “Texas is a tourism state,” Whitley said. “A lot of people come here. I’d be glad to take any Yankee’s money that comes down here, in the form of sales tax, and keep it here and use it here. That’s one of the advantages on the sales tax.”

Property tax relief has been top of mind for both local and state officials for several years now. “For about the last 10 years there has been a lot more finger-pointing and calling us [local governments] the liberal spenders than there has been work addressing the issue,” Whitley lamented.

The state’s share of funding for school districts has dropped year after year. Some state leaders have blamed local elected officials for rising local property taxes. They’ve proposed revenue caps for cities and counties.

Sen. Paul Bettencourt (R-Houston), who chairs the Senate Select Committee on Property Tax Reform and Relief, has led this charge. He’s compared city and county property tax collections over the last decade to the growth of median household income. A chart displayed at committee hearings shows county property tax collections up 71 percent, while median income rose just 29 percent.

The graph is dramatic, technically true, and, according to economist Matthew Gardner, a senior fellow at the Institute for Taxation and Economic Policy as quoted by the Dallas Morning News, “worse than meaningless.”

“In case you don’t remember from your math classes, median is the middle number,” said Whitley. “I can have 100 numbers, and regardless of their value, median is the fiftieth number. The average is to take all 100 of those numbers, add them up and divide by 100. So, the average in these instances is most likely going to be significantly higher.”

Whitley, who is a certified public accountant by trade, did the math. “In Tarrant County, over the last 10 years I did the look-back. The tax levy has increased on average about four percent. Average income has increased about six percent. So, it kind of blew a hole in their little theory,” he said.

During the last legislative session, Rep. Dennis Bonnen repeatedly emphasized that revenue caps may slow revenue growth for cities and counties, but provide “not an ounce of property tax relief. Anyone who is suggesting that is giving you bad information,” he said.

“We can talk a lot about things that will slow the growth,” Whitley said, “but we’re not talking about things that will reduce property taxes, and if we’re going to reduce property taxes, then I think that’s where we’ve got to begin to look at the exemptions and sales tax, we’ve got to look at the state’s share of M&O, and maybe even some of the facilities costs — the I&S.”

Whitley says his elevator pitch on property taxes is a simple six words he hopes the Legislature can get behind. “I want to lower your taxes,” he said. “It’s that simple.”