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After humming under the surface of conservative politics for nearly three decades, a bold question has emerged front and center in this year’s legislative tax cut debate: Can Texas eliminate school property taxes altogether?
An influential conservative think tank floated the idea at the beginning of this year’s legislative session, ranking that goal among its top 2023 priorities. Gov. Greg Abbott has jumped on the bandwagon, too, declaring on Twitter this month that “Texans want to OWN their property, NOT rent it from the government.”
But the excitement around the idea has also generated opposition from places expected and unexpected. School districts fear loss of independent authority over their finances — the foundation for the creation of the districts in 1875 — if the only reliable way to collect local taxes is removed. Lt. Gov. Dan Patrick, who has rarely met a tax cut he doesn’t like, has derided the notion as a “joke” and a “fantasy.”
That the debate has sparked such contention among Republican leaders who are usually aligned in their anti-tax views shows how complicated the art of funding schools is in Texas. While property taxes are unpopular in Texas, the alternatives — such as sales tax or income tax — don’t have much support, either.
Legislative leaders plan to spend at least $12.3 billion on new property tax cuts, no matter what plan they eventually agree upon. A massive state $32.7 billion surplus this year will allow them to do that while still growing per-student funding over the next two years. But worries persist about whether the strategy of slowly shrinking school property taxes — or phasing them out entirely — will bleed school districts dry in the long-term.
“All this talk about compressing tax rates is great, you know, folks need property tax relief. That’s an obvious need in this state,” said Brian Woods, superintendent of Northside Independent School District in San Antonio. “But it doesn’t put a single dollar into a teacher’s salary. It doesn’t put a single dollar in a classroom for supplies or materials or programs for kids.”
Many have tried
As home values in Texas have skyrocketed in recent decades, the pressure on lawmakers to reverse property tax growth has been immense. But two factors complicate attempts to address the issue. First, those taxes are levied at the local level. Second, there are few attractive options to get the money elsewhere.
School taxes make up the largest portion of property tax bills, and the maintenance and operation taxes — the source of districts’ money for teacher salaries and other operating costs — make up the biggest share of those.
Each individual district has its own M&O tax rate. But state law requires districts to have access to essentially equal funding on a per-student basis. That’s where the state steps in. The property values in each district vary widely — from the downtown towers and expensive homes in Austin ISD to rural districts with few commercial properties like Boles Independent School District in North Texas.
To address that inequity, the state has sent extra money from the “property rich” districts to the “property poor” ones, a system derided as “Robin Hood” by critics. To cut down on property tax bills, the state has pumped in more money from taxes it collects to offset some of those differences — a process called “compression.”
But property tax rates in Texas remain among the highest in the country — in large part because there’s no state income tax to help fund schools. Ideas to reduce that burden are frequently raised in the Legislature.
In 1997, Talmadge Heflin, a Republican state representative from Houston at the time, introduced a bill and a constitutional amendment to eliminate property taxes and replace them with an expanded sales tax on unprepared foods, services and other items.
Heflin said it was the inclusion of the sales tax expansion, an idea later disparaged by opponents as the “tortilla tax,” that blocked its passage on the House floor. The constitutional amendment needed 100 votes in the 150-member House to advance. It got the support of every Republican in the House but garnered fewer than 70 votes.
In 2006, lawmakers cut schools’ M&O taxes by a third and sought to replace that revenue from the state’s franchise tax, tobacco taxes and motor vehicle sales taxes. Those new sources didn’t bring in as much revenue as expected, however. And the Great Recession soon followed, forcing the state to cut $5.3 billion from schools in 2011. Districts had to increase class sizes, cut essential programs, reduce bus routes and cut staff to keep the lights on.
In 2019, state leaders tried to tackle the issue again. Abbott, Patrick and then-House Speaker Dennis Bonnen proposed increasing the state sales tax by 1 percentage point and using that revenue to buy down school property taxes. That proposal, like Heflin’s more than 20 years earlier, failed to pick up sufficient support.
Instead, lawmakers used surplus funds to compress school M&O taxes in a way designed to be continuous and self-funding. The formula uses surplus tax collections from rising property values, which are sent by districts to the state after their budgets are met, to fund the compression — easing the burden on local taxpayers and creating a self-perpetuating mechanism for continuous tax relief.
The fix stabilized the rates and addressed several inequity issues. But when the pandemic hit, the economy took a financial beating while an unexpected rise in property values resulted in less tax relief than expected.
“Tax compression is about lowering tax rates as property values increase, with the goal that taxpayers will see lower — or at least stabilized — tax bills,” said Mary Lynn Pruneda, who oversaw school finance policy for the governor when that bill was passed and now serves as public education finance adviser for the advocacy group Texas 2036. “In 2019, the Legislature paired a tax rate buydown with a structural change that would automatically compress tax rates over time as values rose. But when property values rose faster than expected in recent years, it can still take some time for tax rate compression to catch up.”
Without the limits the Legislature placed on tax revenue growth in 2019 and an accompanying buy-down at the time, tax bills would be much higher. But in a rapid property-value-growth scenario, that relief is harder to feel. Pressure to address property taxes in a more noticeable way, along with the need for a few other updates to the 2019 plan, are likely “what led us to where we are today,” Pruneda said.
Surplus creates opportunity
After leaving the Legislature, Heflin joined the Texas Public Policy Foundation, a well-financed Austin-based think tank with close ties to Abbott and other state leaders. As the 2023 legislative session was getting started, the organization listed eliminating property taxes as its No. 2 priority for the year. But this time, its proposal didn’t include raising other taxes. Instead, the group argues, Texas’ growing economy is creating regular state surpluses. Committing surplus dollars to buying down school taxes and keeping a lid on state spending would make phasing out property taxes possible in potentially a decade without raising other taxes, the group says.
The timing is good to make such an argument. A booming Texas energy sector, increased consumer spending driven by federal COVID-era stimulus and higher prices due to inflation created unprecedented amounts of sales tax revenue ahead of 2023. The state’s $32.7 billion surplus offers a convenient way to pay for major property tax cuts, without needing a tax increase elsewhere for now.
Heflin said a “backup plan” such as a broadening of the sales tax, as he proposed decades ago, is still worth considering. But even though Heflin believes lawmakers would raise taxes in the future if the schools are threatened, he said, a replacement tax stream is an apparent nonstarter this time.
“I haven’t heard anybody talking seriously about increasing a tax to replace the property tax,” Heflin said. “It’s just using the surplus, and that’s a much easier sell.”
But cutting taxes has proven to be more difficult than expected, thanks to fighting between the House and Senate. The Republican leaders agreed on how much to spend on tax cuts, but wrapped up the regular session without settling on how. They have remained at odds ever since Abbott called them back for an immediate special session, bickering over Twitter and calling each other out in interviews.
Abbott has been clear on what he wants — to spend all the $12.3 billion on compression. He has urged lawmakers to “use the TPPF roadmap to end property taxes.” The House under Speaker Dade Phelan has signed on, approving a bill that aligns with Abbott’s request. But Patrick insisted on a plan that diverts 30% of the money to an increase the homestead exemption, the part of a home’s appraised value that is exempt from property taxes.
That proposal would concentrate a higher share of the savings on homeowners, while the House plan would ensure that homeowners and commercial property owners would see the same percentage cuts.
At the heart of Patrick’s argument: Eliminating school property taxes is unrealistic without a substantial increase in the sales tax.
“If you’re going to eliminate all property taxes, you have no money left to do anything,” Patrick told reporters last week. “There would be no funding for education, no funding for health care, no funding for law enforcement.”
Scared school leaders
Many school officials from across the state share Patrick’s concern. And some stress that they already don’t have enough money to attract teachers, repair facilities or even run all of their bus routes.
Scott Muri is superintendent of Ector County Independent School District, a “property rich” West Texas district. In his 906-square-mile district, Muri said, it’s been difficult to pay staff high enough wages to compete with nearby oil and gas companies. Bus drivers have been hard to retain, for example — and they’re a huge necessity in his sprawling district.
Even now, with the state flush, officials in many of the districts — including Muri’s — are passing deficit budgets because lawmakers have yet to set their funding levels for the fiscal year that starts in September.
“There’s a lot of attention being paid to [eliminating school taxes] right now,” he said. “Anytime you are removing the decision-making power from the local authority — in this case, school boards — and replacing that with state authority, that's a concern. Our state is not designed to operate like that. And yet, that's what seems to be happening.”
And school leaders say they worry that cutting taxes without finding any other kind of revenue source will leave them vulnerable to major cuts when the economy takes its next downswing.
Woods, the Northside ISD superintendent, said that with no continuing increase in funds to address soaring costs for schools caused by inflation, the additional spending power lawmakers had given to schools in 2019 has been “wiped out.”
In 2011, his San Antonio-area district was forced, like other districts, to cut about 10% of its budget.
Because his large district spent 87% of its money on teachers and other staff, human resources was the only place to make meaningful cuts — which they did through attrition, trimming staff by what he estimated was between 5% to 7%.
Measures of student achievement have shown a “pretty dramatic flattening of progress” among Texas students since those budget cuts were implemented, he said.
“The big concern is that you not do something that you cannot afford when times are less good,” Woods said. “Because then just like you did in 2011, you cut schools to balance your budget, and you balance your budget on the backs of children.”
Advocates fear that the goal is to eliminate public education altogether and place it in the hands of private, unregulated entities. They point to the other big public education issue likely to dominate the next few months: Abbott’s push to allow parents to use state funds to pay for private school tuition.
With the notion of killing property taxes gaining steam, lawmakers have the means, and are currently creating a motive, for shutting down the system entirely — a move that would destroy access to quality education for all but the wealthiest people, said Chandra Villanueva, director of policy and advocacy at the left-leaning nonprofit Every Texan.
“This is all just smoke and mirrors about defunding our schools. That’s the end goal,” Villanueva said. “The wealthy families will be fine, they’ll always have options, but poor families are going to end up in University of Phoenix elementary schools that will open up in a storefront near you.”
Heflin, the former state representative, said he didn’t see that happening.
“I do not believe that there is a legislative body in the future that would starve education,” he said. “Let’s just say they did fully eliminate the [school tax]. I think they would come in if they had to and increase a tax at the state level to keep it funded. I think they would.”
Starving public education of funding “was never a thought of mine when I was pushing that idea,” he said.
But he believes that some kind of deal on property tax cuts is coming.
“Too many people have made commitments to just let [property tax cuts] die,” Heflin said. “Something will get done.”
Disclosure: Every Texan, Texas 2036 and Texas Public Policy Foundation have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.
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