The Texas Supreme Court has ruled our school property tax system to be a constitutionally prohibited statewide property tax.
The reasoning is as follows: a tax is local only if the state does not so completely dictate expenditures and limit local tax rates that a local entity cannot determine its own priorities, thereby having essentially no discretion to finance projects and purposes beyond the state’s mandates.
Many districts are at or near the statutory maintenance and operations (M&O) rate cap, meaning they have no discretion to go beyond state mandates. That is the essential finding that caused the court to rule that we have a statewide property tax in the school M&O property tax, which is capped by the legislature at $1.50 per $100 property value.
It appears that until the legislature fulfills its responsibility to statutorily define what constitutes essential education, the court has determined to view all spending as essential, thus creating the current crisis.
The real issue becomes how near school districts are, on average, to the $1.50 cap. Currently, the weighted average rate is about $1.45.
So there is only a 5 cent gap between the average school M&O property tax rate and the $1.50 cap. Presumably, the state would no longer be in violation of the constitution’s prohibition against a statewide property tax, according to the court, if the “rate-cap gap” were to increase.
There are three basic mathematical possibilities for growing the rate-cap gap (excluding options that force M&O rates to rise). These include: 1) increasing the cap to a rate greater than $1.50; 2) buying down property tax rates, and 3) buying down rates and decreasing the cap but decreasing the cap less than the buy-down.
Whatever option is chosen to increase the rate-cap gap, this “fix” will only be temporary. At most, barring some kind of radical change in the court or other action by the legislature, a sizeable increase in the rate-cap gap might buy 10 years’ respite before we once again have a de facto statewide property tax.
The reason for this is simple. History shows us that absent a revenue cap, school M&O property tax rates WILL rise. It is only a matter of time until they close the rate-cap gap enough to make it too small again.
The legislature can begin moving toward a permanent solution by using excess revenues to buy down the property tax. This is the first move toward putting a spending limit in place that caps spending with growth in inflation and population. Beyond that, the legislature can fulfill its responsibility by defining the state’s responsibility so clearly that the court can readily determine which expenditures are indeed a result of local discretion.
One reason the rate-cap gap will shrink due to rate increases lies with the Robin Hood school funding system, which is itself essentially a court mandate. Because the court has said there must be a (unspecified) measure of tax and expenditure equality in the schools, and because the property tax is the chosen local school tax base, the Robin Hood system is inevitable. It requires relatively wealthy districts to give money to relatively poor districts in addition to state aid, which automatically falls as property wealth increases. A cap is also necessary in order to avoid too great a degree of inequality.
Low-wealth districts are encouraged to increase rates due to state and wealthy district subsidies. High-wealth district administrations have an excuse to increase rates in the rake-off of local property tax funds that go to low-wealth districts.
The last time school M&O property tax rates were substantially reduced with a state buy-down was in 1997. Texas property taxpayers never saw any of the benefit because property tax rates almost immediately bounced back to where they were.
This time around, the legislature must do more to protect taxpayers.