Primer on Property Tax and School Finance
The Connection Between Property Tax and School Finance
As published by the Waco Tribune-Herald.
Few are the people who take delight in paying property taxes. Yet when we understand where our dollars go and have confidence they are being spent wisely on services and infrastructure of benefit to us all, the sting is lessened and, in fact, we may appreciate the quality of life and services they provide.
Nevertheless, when the growth of our tax burden outpaces the growth in our income, it can cause a strain that is more intimately felt. The same is true in the commercial sector. Businesses may be reluctant to make new hires (i.e., create jobs) or otherwise expand their business (which oftentimes includes a capital investment that boosts our tax rolls) if they face uncertainty on how their property taxes may increase from one year to the next.
In that vein, property-tax reform has been a battle cry of the last regular and special state legislative sessions. At the Greater Waco Chamber of Commerce, we stand with our members and businesses in calling for policy solutions that will offer true and meaningful property-tax relief and reform. Businesses experiencing a 200 percent increase in land valuations will not support the sustainable growth and development so many in our community have worked so long and so intentionally to foster. To discuss what those meaningful solutions could be — and what they are not — it may be helpful to widen the scope and provide a bit of context.
Our property-tax bill comes from the taxing entities in our jurisdiction: city, county, school districts and community colleges. Each entity determines its tax rate and may tax up to a maximum rate determined by the state government. If they want to increase over 8 percent from one year to the next, they must take this proposition to the voters for approval (this is called the roll-back rate).
Many taxing entities strive to lower their rates when possible. Our local county leadership has successfully done so the last two budget cycles. With that in mind, let’s consider the other piece of the property-tax system, which is the appraisal valuation.
Unlike the tax rate, which is set locally, the appraisal valuation is not fully within the local appraisal district’s control. State of Texas Government Code Section 403.302 requires the State Comptroller’s office (the Property Tax Assistance Division) to conduct a Property Value Study (PVS) to determine the total taxable value of all property in each school district every two years. For each study, the state selects a sample and determines what they feel are fair market values for each property.
For this year for Waco Independent School District, state officials looked at 400 of 26,000 properties, determined what they felt were their values and used those to set the range in which other properties in the district should fall. Interestingly, many of the properties selected were prime properties in areas of town experiencing increased development interest, such as within the Tax Increment Financing Zone, or two at Barron’s Crossing. We should remember those properties are not truly representative of all properties within WISD.
The state comptroller study is then used to determine appraisal district performance, with the performance metric being that the appraisal district must come within a range of 5 percent below/above the total value set by the state. Let that sink in a moment.
Let’s turn to another aspect. This might seem a change of topic, but read on to fully consider. On the floor of the Texas House of Representatives during the special session, a legislator asked Rep. Dan Huberty, chairman of the Public Education Committee who had proposed legislation (HB 21) to boost education funding to the tune of some $1.8 billion, if in fact the state weren’t spending more on education today than ever. While technically true, this does not recognize that the number of students we have in the system is growing at a rate that far outpaces student spending. The net effect is that the per-pupil amount of state funding is less every year, with current spending levels below pre-recession levels of 2008, before even taking into account inflation. Adjusted for inflation, in 2015 dollars, Texas was spending $10,260 per student in 2009-2010. Today we spend just $8,935.
Further, our demographic trends in Texas are such that our percentage of English language learners — a group more costly to prepare for success in our educational system and for post-secondary success in our workforce — is growing more rapidly than other student groups. So the need is greater now than ever, but the state dollars are slipping away from education. Texas, in fact, ranks 43rd in the nation in per-pupil spending (up from 49th in 2012). Our student outcomes reflect that. According to the U.S. Department of Education, Texas ranks 40th in percentage of fourth graders reading at grade-level (46th in the nation for Hispanic students alone) and 41st in the nation in post-secondary matriculation. While 46 percent of young adults ages 25-34 in the nation hold a certificate, associate’s degree or higher, in Texas just 38 percent of adults in that same age range do. For the Texas economy to remain competitive and grow, it is imperative we develop our talent and workforce to support the very businesses that will drive our economic growth.
Declining state funding
Historically, state support of education spending (per-pupil spending) was an even split, 45-45, between the state and local school districts (via those property taxes discussed above) with the remaining 10 percent coming from federal dollars. Over the last decade, the state’s share of per-pupil funding has been gradually declining, from about 45 percent for the last couple of decades, to around 36 percent in the upcoming budgetary biennium from the state. The balance, of course, must be made up by increased local share, which means increased local property taxes.
I’ve burned the midnight oil looking over budgets of years past, digging through Legislative Budget Board reports, and running numbers and scenarios, but in the interest of brevity, and for some wonderful real-life projections of impact, I simply would refer you to the excellent Texas Tribune article by Ross Ramsey, “Analysis: The state’s declining support for public education in Texas” (December 2016). One standout fact from that read is this: Had state support of education remained at 44.9 percent over the last decade, the state would have spent $18.6 billion more and school district taxpayers would have spent $11.6 billion less. But as the state reduces its share, local districts must fill the gap — and the way to do that is by raising property taxes. Further, as our state experiences economic growth, property values may experience market-driven increases as well. The state has used these as an excuse to decrease its own education spending.
The crux is this: State aid in education declines — is able to decline — as local property values rise. And values are within a range set at state level, though not necessarily market-driven. This is codified statutorily for the Comptroller’s Office and again in the state’s budget (SB 1) crafted by state legislators and passed by the legislative conference committee. It’s an exhaustive 900-plus-page document and, in Article III of the 85th legislative session’s SB 1, relating to the Texas Education Agency, page 5, subsection 3 tells us clearly: Property values, and the estimates of local tax collections on which they are based, shall be increased by 7.04 percent for tax year 2017 and by 6.77 percent for tax year 2018.
We know it is inevitable that property values will continue to rise because the state is mandating it and has given that directive in the state budget. State officials have set the values to which our appraisal district must adhere.
When we consider all these components, it is curious then for the Texas Legislature to consider lowering the property-tax rollback rate from 8 percent to 4 percent or even 6 percent as the best solution for property-tax reform. The problem, as we can see, is not the rate but the rising values. And that range of values is artificially created and imposed by the state. Again, our appraisal district must adhere.
If we want meaningful property-tax relief — which we as the Greater Waco Chamber of Commerce do — we must address the real problem, which is the broken way we fund our public schools, and stop shifting the cost from the state down to the locals. This is a shift we have seen already: cities being expected to maintain state/federal rights-of-way along our interstates and highways but not given funding to do so; counties being required to provide mental-health services for inmates (a worthy investment, though also one that perhaps should fall more squarely under the state mental-health umbrella) but not given money to provide them; and schools being mandated to give teacher raises or implement more rigorous high-quality early-childhood education programs but not given money to do so. The state is shifting more responsibility to local entities but not providing the funding, which means no choice remains but for local property-tax bills to increase.
Further, the state proposes to limit the amount local entities can raise to meet such responsibilities, all while setting the valuation ranges — a fact many voters don’t know — so that local appraisal districts bear the brunt of citizen outcry when property taxes rise when, in fact, the state has directed it to be so.
We applaud the work of the Texas House of Representatives, Speaker Joe Straus, Chairman Huberty, his Public Education Committee and its outstanding staff, who worked to craft some meaningful solutions to the property tax-school finance dilemma. We are grateful our representatives supported that bill. We applaud Chairman Larry Taylor and the Senate Education Committee for their call to study school finance during the interim and we appreciate our senator supporting that aspect of the bill.
Perhaps if we can talk and move toward repair of our method of school finance, then we can make more progress on broader educational reforms to improve the system. Advocates of public education are often wary of educational reforms. If we fix the system of cost-shifting down to the local government, we could then turn to such education reforms, all while also righting the burden of our rising property taxes. Conversations about what education reforms will improve student outcomes seem premature if the essentials of adequately funding Texas public schools isn’t first addressed.
It’s imperative to our future economic growth and vitality that we address our broken property-tax system. It is certainly true that, because Texas does not have a state income tax, our overall tax burden places us in the middle of the pack in a state-by-state ranking. Yet our property taxes are among the highest in the nation. The pro-business orientation of our elected leadership and a friendly regulatory environment have allowed us in Texas to be very successful in attracting and expanding business. Imagine how much stronger our hand would be in competing for new business — particularly those that are capital intensive and thus generate higher property taxes — if we were able to lower our property-tax bills. Property tax relief and reform is possible. It begins with fixing our method of funding Texas public schools.
Meaningful property-tax reform and relief is important to businesses and residential owners alike. Perhaps if we could set aside our ideas about what we’ve always known, and be willing to think outside the box about meaningful policy solutions, we could create a property-tax system that allows the certainty that businesses need to grow and thrive, while also improving school funding and student outcomes so that our schools are strengthened and can create a future workforce ready to meet the needs of a thriving state economy that supports enhanced quality of life for us all. The prosperity and economic strength of our state — and all her people — depends on it.
-Jessica Attas is director of public policy for the Greater Waco Chamber of Commerce. Our mission is to “prepare and market the Greater Waco region for the businesses and jobs of the future and an outstanding quality of life.”