School Finance Drives Texas Budget, Tax Talks

Published April 1, 2005

Two years ago, Texas legislators sweated through a legislative session with a $10 billion budget shortfall. They found ways to cut spending and cover the shortfall, passing a $117 billion biennial budget. Taxpayers gave Gov. Rick Perry (R) high marks for getting a budget passed without raising taxes.

During the current session, even with a $400 million surplus, legislators once again face tough decisions as they consider a biennial budget that may reach $136 billion. The surplus will not be nearly enough to bridge the gap between funds currently available and the funds that may be needed as legislators seek to address a school finance dilemma that hovers like a storm cloud over the Texas capitol.

Perry is loath to raise taxes, and he has said any revenue bill sent to him by the state legislature must be revenue-neutral. Perry and other state government leaders–including fellow Republicans Lt. Gov. David Dewhurst and House Speaker Tom Craddick–are looking for a way to expand an existing tax or implement a new tax for school funding while maintaining a favorable business climate and achieving revenue-neutrality.

Property Tax Unconstitutional

Texas has a local property tax system that currently provides almost 60 percent of the state’s public education funds. Local property taxes have escalated in recent years due to rate increases and rising property valuations.

Some 300 school districts, including Dallas and Austin, have sued the state, charging the Texas public school finance system violates rules set forth in the state constitution governing local property taxes. They contend local districts have lost meaningful control over their tax rates.

In November 2004, Judge John Dietz, presiding judge for the 250th Judicial District in Travis County, issued a Final Judgment, supported by Findings of Fact and Conclusions of Law, finding the Texas public school finance system unconstitutional because it violated mandates for “efficiency, suitability and adequacy” of school funding. The state has appealed to the Texas Supreme Court.

Billions in Cuts Sought

Pending the state’s appeal, legislators are working to address Dietz’s ruling. They hope to identify $3 billion in budget cuts and raise $8 million in additional revenues, which would allow state funds to replace one-third of the school funding currently raised by local school property taxes.

Rep. Carl Isett (R-Lubbock) has been charged with scrubbing the state budget to find $3 billion to cut. He also has introduced the Texas Taxpayer Bill of Rights (TABOR) legislation, which he has championed the past several sessions to give teeth to the state’s tax and expenditure limitations.

As of early March, the Texas House was considering a revenue bill that would cut local property tax rates for schools by one-third, from a maximum of $1.50 per $100 valuation to $1. The measure would reduce property tax revenues by about $5.5 billion, which would be offset by other taxes raising about the same amount.

Suggested replacement taxes include an increase in the state sales tax from 6.25 percent to 7.2 percent; an extension of the sales tax to include bottled water, billboard advertising, car repairs, and car washes, along with an increase in the motor vehicle sales tax from 6.25 to 7.35 percent; and an additional $1 tax on cigarettes.

The Texas constitution prohibits personal and corporate income taxes, and few legislators favor amending the constitution to allow for such taxes.

The Texas Senate, led by Dewhurst, has floated a plan for a statewide property tax. Dewhurst has said he believes businesses will agree to a low-rate tax that everyone pays.

Legislators have until the end of the regular legislative session in May to adopt the biennial budget.

Peggy Venable ([email protected]) is director of Americans for Prosperity in Texas.

For more information …

The Final Judgment and Findings of Fact and Conclusions of Law issued by District Judge John Dietz in November 2004 are available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for documents #16633 (Final Judgment, 8 pages) and #16632 (Findings of Fact and Conclusions of Law, 126 pages).