Hey, Texplainer — Lawmakers’ plan to raise sales taxes failed, so how did they pay for an investment in public schools and property tax cuts?
2019 may have been the perfect year for lawmakers to pass an ambitious and expensive school finance reform and property tax reduction plan. Now Texas politicians face questions about whether doing so — without raising taxes elsewhere — will be sustainable in less auspicious times.
A confluence of fiscal coincidences made 2019 a cheerful year for budget writers:
A mostly sunny economic forecast led lawmakers to believe they’d have $10 billion or so more in state funds to spend in this two-year budget compared with the one they passed in 2017.
A one-year bump in federal reimbursements for the state’s health care costs allowed lawmakers to free up billions of dollars for other programs.
A U.S. Supreme Court ruling poured another $550 million or so into state coffers by allowing the state to collect additional sales tax revenue from online sales.
And a historically full state savings account helped pay off pressing infrastructure needs, alleviating pressure on other programs competing for funding in the two-year spending plan.
Lawmakers decided to pump almost all of the new revenue at their disposal into the education portion of the state budget.
The result was a new school finance bill — still awaiting Gov. Greg Abbott’s signature — that will cost more than $11.5 billion in 2020 and 2021. Of those funds, about $5 billion go toward cutting property taxes on homes and businesses and $6.5 billion pay for educational reforms, including a 20% hike in schools’ baseline per-student funding.
The commitment to property tax reduction poses a particular long-term challenge. In Texas, school district property taxes have for years made up the bulk of funding for K-12 education, with state dollars supplementing those funds to cover most of the rest. As local property values have risen in rapidly growing Texas, the state has been on the hook for less and less to pay for public schools. That freed up the state to use money it would otherwise spend on public education on other priorities in the budget, while home and business owners paid more in taxes.
Unlike previous legislative interventions in the school finance system, the reforms passed this year include a cap on how much school districts can raise in property tax revenue. School districts with property values growing 2.5% or more per year would have their tax rates automatically decreased to keep their tax revenue growth in line. The state would be required to reimburse school districts for any additional money they are entitled to. That mechanism, advocated by Abbott, is intended to increase the property tax cuts’ longevity.
In cities like Austin, where real estate prices are growing rapidly, the state will be on the hook to pay for expensive, ongoing property tax relief. Some worry that’s a risky bet for the state in years when the treasury is less full — thanks to, say, an economic recession or a precipitous drop in oil prices.
By committing more to limiting property tax increases, lawmakers will have less money available for other priorities, including health care programs and higher education.
Moody’s Investors Service, a credit-rating agency, wrote in an analysis of the school finance bill that it was “credit-positive” for school districts. The trade-off, analysts warned, was that “shifting more costs to the state exposes school districts to potential state budget cuts in future economic downturns, especially since the new funding is financed with expected economic growth.”
Former House Speaker Joe Straus, a San Antonio Republican who advocated for school finance reform in 2017, seemed to echo that concern, even when he praised the legislature’s work on school funding.
“Many of us have long said the best way to provide property tax relief is through school finance reform,” he wrote in a Facebook post celebrating the bill’s passage. “Hopefully, the Texas economy will continue to perform strongly enough to support and sustain the ambitious efforts in this legislation to contain property tax rates.”
Such concerns left lawmakers scratching their heads over a way to make sure there would be enough money in future legislative sessions to pay for sustained property tax cuts and possible future increases in per-student funding. But finding money would have meant raising taxes, and politics quickly got in the way.
Texas’ Republican leadership favored raising the sales tax to pay for property tax reductions. The so-called “tax swap” failed to pass amid bipartisan opposition. Some Republicans said they could not vote to raise any tax during a year of surplus; Democrats opposed raising the regressive sales tax to benefit property owners because it would have disproportionately burdened low-income Texans.
Other ways of raising funds, such as applying the existing state sales tax to more kinds of goods and services by eliminating certain tax exemptions, never got off the ground. And as for a state income tax? Lawmakers moved to eliminate even the possibility of one in the future by amending the state constitution.
Still, many are optimistic that the school and property tax reforms will be long-lasting. In a tight budget year, lawmakers should still have enough money to cover the costs of the school finance reform package, known as House Bill 3, said Dale Craymer, president of the Texas Taxpayers and Research Association, which represents businesses on fiscal policy. The reforms’ price tag is expected to grow to $13.4 billion in the 2022-23 budget cycle.
"The money in the system should be enough to sustain HB 3,” Craymer said. “The state may yet have fiscal challenges, but that will be from a recession or weak oil prices, not because of HB 3.”
The bottom line: Texas lawmakers had billions more dollars to spend this budget cycle, and they poured almost all the funds into public education and property tax cuts. But a new mechanism designed to keep the state paying for ongoing property tax relief could put schools — and other parts of the state’s budget — at greater risk for budget cuts in years of economic hardship.