Resource Center

• by Albert Cortez, Ph.D. • IDRA Newsletter • March 1997

In January, the governor of Texas announced his long awaited program to reduce property taxes in Texas. As described in materials distributed by the governor’s office, the plan includes an increase in the homestead exemption (the portion of the value of a home that can be exempted from local school property taxes) from the current level of $5,000 to $25,000. The plan exempts business inventories from local school taxes and reduces tax rates by 20 cents in all school districts.

On the surface the proposals sound very appealing to taxpayers. However, people who are also concerned with improving the quality of education overall and improving equity in the state’s public school funding system are cautioned to look at the proposed plan with a very critical eye.

Lost so far in the public discussion of the governor’s plan is a comparison of educational spending levels in Texas and other states in the country. According to the National Center for Education Statistics, Texas ranked 28 among the 50 states in average spending per pupil in 1993-94 (Clark, Praskac and Walker, 1995). Before rushing into some strategy that purports to reduce taxes, policy-makers should consider the quality of public schooling available to local communities and whether or not that quality is commensurate with what is needed to ensure access to equitably funded, excellent schools for all Texas students. While the state’s ranking has improved in the two years since that 1993-94 data was compiled, it is safe to assume that Texas ranks somewhere in the middle at best, while many comparable states rank in the top quarter of expenditures per pupil.

Effect on Equalization

While a look at the state’s standing relative to the rest of the nation is useful, we should also consider the extent of equity in the funding system in Texas. Data presented in the Edgewood school finance court hearings showed that, even under a best-case scenario assuming the state would fully fund equalization formulas, a gap of $600 per pupil would be maintained between the state’s poorest and wealthiest school systems. So far, the state funding system has not received anything near the full funding level proposed in the Edgewood hearings and used by the Texas Supreme Court to justify its position that the Texas system can now be considered acceptable.

In the 1996-97 school year, the Texas funding plan guarantees that each school district will have $21 for each cent of school tax rate (up to 64 cents per $100 of property value). More than 90 school districts can generate more than the equalized level of $21 because they have wealthier tax bases.

For example, a school district with a tax base of $280,000 can get $28 for each one cent of tax effort, meaning it gets $5.50 more per student for each penny of property taxes. Multiplying that $5.50 times the maximum of 64 cents that are “equalized” by the state increases the gap by an additional $352. Adding the $600 of unequalized enrichment and the $352 gap reveals a disparity of $952 per pupil. That is, two districts with an identical tax rate of $1.50 would have a difference of $952 per pupil because the state does not equalize the current state-supported educational program.

The proposed local school property tax reduction calls for a mandated uniform reduction of 20 cents statewide. Under this plan, a school system with a local property tax base of $280,000 per pupil would receive $560 (0.0020 x $280,000) in state funding to replace the local revenue it would have raised without the tax reduction. A property poor school district with a local tax base of $28,000 per pupil would receive only $61 in state funding since this is the total amount of local tax revenue that would have been raised without the tax reduction.

We see in this example the effect of providing state aid in a manner that ignores local district tax bases and existing tax efforts. Though it may seem fair on the surface, the 20 cent “property tax relief” proposal would really give the greatest amount of state funding to school districts that already have the greatest property wealth.

Some people argue that this inequity is all right because high wealth districts raise the most local tax money as a result of their larger tax bases. But this approach would use millions of dollars of state money to maintain an unequal education system. The chart on Page 3 summarizes the estimated cost to schools under the segment of the governor’s plan that mandates local school tax reductions.

A second concern with providing tax relief in inverse proportion to local wealth is that this short-term relief will create a “reserve” potential or “tax cushion” in property wealthy districts that could be used in the future and would further expand spending disparities, particularly if future tax increases made by districts occur at tax levels above where equalization funding is provided (above $1.50).

Above the $1.50 tax effort, the state does not provide additional funding. If local schools were to use the cushion created by providing state monies to replace local taxes, high wealth school districts could choose to increase debt service taxes and raise millions of local tax dollars that would be totally unequalized, bringing into question the whole legitimacy of the existing system.

Proponents of the plan argue that such a dollar-per-dollar replacement will not create any further inequity in the system than currently exists. While this is true, it will cost the state an estimated $1.6 million per two-year funding cycle to replace the local property tax revenue reductions in local schools. IDRA and other equalization proponents believe that the state funding would be better spent if it were directed toward increasing funding for programs and facilities that provide excellence and equity in education for all students.

Other Possibilities

Other means are available for the state to provide tax relief to residents in the state’s highest taxing school systems and, at the same time, use available state money to create equity in the school funding system.

On the equity issue, putting the surplus state money into an increase in Tier II Guaranteed Yield funding would significantly reduce the disparities remaining in the present system. By increasing the guaranteed level from the current $21 to $28, the differences in yield within the current system would be effectively neutralized, thus providing equal return for equal tax effort across Texas school systems.

A second option, that could be used by itself or in combination with the increased Tier II funding, involves providing tax relief on the basis of existing total tax effort – with the local districts exerting the greatest effort receiving the most relief. To ensure that such an approach has no dis-equalizing effects, state funding could in turn be adjusted based on the property tax level per pupil of eligible school systems.

A third option mentioned in recent legislative hearings involves increasing the amount of money districts would be guaranteed for each cent of tax effort. Since several districts can get the same total revenue with different tax rates, the legislature could mandate that some of the local property tax money used to fund local schools be returned to taxpayers in the form of tax relief.

Though not intended to be all-inclusive, these alternatives demonstrate that the state has a variety of options available that can actually improve the quality of local schools, promote equalization and provide tax relief for local property owners.

At this writing, reaction to the governor’s plan are beginning to emerge, and alternatives to and variations of the property tax relief concepts are beginning to develop. IDRA will continue to monitor developments in this area and keep IDRA Newsletter readers advised of significant developments.

Resources

Clark, C. and A. Praskac and B. Walker. Educational Finance Briefing Paper: Texas Public School Finance and Related Issues. (Austin, Texas: Texas Center for Educational Research, 1995).

Albert Cortez, Ph.D., is the director of the IDRA Institute for Policy and Leadership. Comments and questions may be sent to him via e-mail at feedback@idra.org.

[©1997, IDRA. This article originally appeared in the March 1997 IDRA Newsletter by the Intercultural Development Research Association. Permission to reproduce this article is granted provided the article is reprinted in its entirety and proper credit is given to IDRA and the author.]