by Sarah Pollock (Supervisor: Paul von Hippel)

Overview

Public schools in Texas are funded by local property taxes (over 50%) and state revenue (over 40%), with a small portion from federal funding. Any school district that cannot fully fund itself through property taxes receives additional funding from the state and federal revenue. The state share is drawn from various sources as follows (Villanueva, n.d.):

• the Available School Fund (~6% of the state share)
• the state lottery (~5%)
•  recapture (~6%)
• the Property Tax Relief Fund (14%)
• the general fund (~69%, mostly generated by sales tax, excise taxes and oil and natural gas production taxes)

Local property taxes are constrained within a 1% minimum and a 1.17% maximum of taxable assessed property value.

The school finance system in Texas has evolved primarily through legislative responses to court decisions stemming from lawsuits filed by school districts, parents, and special interest groups. 

Recapture

Most states fund their public schools through a combination of local, state and federal funding. States generate school revenue from a variety of sources, typically including state property or income taxes, but Texas does not levy a state income tax and abolished all forms of state property tax in a 1982 constitutional amendment. The responsibility for funding public schools in Texas, then, starts with property taxes assessed by local school districts. Districts with less property wealth have at times levied local property taxes at the maximum amount allowed, and still fallen short of the amount needed to educate their students, thereby requiring the state to step in and fill the gap.

To address the inequity between districts with more or less property wealth, the state passed legislation that appropriates some local property tax revenue in excess of the amount calculated for a district's Tier I Entitlement and uses that revenue to fund the state contribution made to districts with less property wealth. This recent change to the system is commonly referred to as "recapture," or "Robin Hood."

Critics have argued that both the propensity of districts across the state to levy taxes at the maximum allowed, and this new redistribution of property tax revenue by the state, essentially amount to different forms of an unofficial statewide property tax. Nonetheless, in 2016 the Texas Supreme Court upheld the entirety of current school finance system as constitutional (Morath, Commissioner of Education, et al. v. Texas Taxpayer & Student Fairness Coalition, et al., 2016).

Current System

The Texas school finance system breaks the amount of money a district spends into two categories: Tier I and Tier II Entitlement. The state uses formulas to determine the amount to which a district is entitled at both levels, then subtracts the amount raised by the district through local property taxes and makes up the difference (if any difference exists).

Tier I Entitlement

Tier I Entitlement refers to the “base” amount of money that a district spends. It is intended to reflect the minimum amount required to provide an adequate public education to a given child. The state establishes a “basic allotment” amount, then adjusts this amount based on a district’s size, Cost of Education Index (which reflects differences in local labor costs (Texas Education Agency, n.d.)), and various student characteristics. Relevant student characteristics include learning disabilities, the need for ESL or career/technical education, economic disadvantage. Additional funding is provided for transportation for students who live more than two miles away from their nearest campus, and additional funds are contributed toward the construction of new facilities. Altogether, this results in the state’s assessment of a district’s Tier I Entitlement amount. (Villanueva, n.d.)

Tier II Entitlement

Tier II Entitlement refers to any amount above the first dollar of property tax that a district levies in the interest of increasing their budget. Tier II Entitlement funds are referred to as "enrichment" funds, and are intended to give districts a way to supplement their Tier I Entitlement amount. Tier II funds are also the source of funding districts must use to maintain or improve currently operating facilities. Revenues from the first .06% above 1% of the property tax levy, referred to as golden pennies, are not subject to recapture, although the final .02% are subject to a direct vote by taxpayers via ballot measure. Districts are allowed an additional increase of up to .11%, referred to as copper pennies, but all of this revenue is subject to recapture and any increase in the tax levy at this level is subject to taxpayer approval of a ballot measure. (TEA, 2013)

For an illustration, consider a district with moderate property wealth and a current tax rate of 1%. They decide they wish to increase their school revenue, so they raise their tax rate to 1.06%. Because they decided to increase their rate above 1.04%, taxpayers are required to approve the increase in a ballot measure. With this increase, their per-student spending goes above their Tier I Entitlement amount, but none of their revenue is yet subject to recapture. A year later, they increase their tax rate again, this time to 1.09%, which requires another ballot measure to be approved by voters. The revenue generated by this latest increase will now be subject to recapture.

2006-2007 Anchor (Hold Harmless)

In 2006, in response to the near-universal implementation of local property taxes at the maximum allowable amount, the state legislature lowered the maximum amount districts were allowed to levy. This new "compressed tax rate" is reflected in the definitions above. To ensure that districts would not suffer reduced funding-per-student by lowering their tax rate, the state makes up any difference a district sees between the total amount to which they would currently be entitled, and the amount they would have had prior to lowering their tax rate. This is commonly referred to as "hold harmless." (TTARA, 2012)

Differences in Distribution

The system as it stands results in differences from district to district in terms of taxation (both as a percentage of property value and in raw dollar amount) and spending. Although spending-per-student varies less across districts with low, middle and upper-middle levels of property wealth, the wealthiest districts (such as those that benefit most from "hold harmless") can afford to spend significantly more per student (Baker and Corcoran, 2012).