| Ad Valorem Tax System Overhaul Robin Hood. That familiar character of old who helped “lift” wealth from the wealthy and redistribute it to the poor. Somehow, in those stories, the rich had it coming to them. Those bad people deserved what they got. And in the end justice prevailed, even if it was served with a bit of vigilante-ism. Ol’ Robin even got the girl. Fast forward from Medieval times to 1995. The Texas legislature came up with a new method to redistribute property tax wealth from the wealthiest independent school districts to the poorest ISDs as the method to ensure that Texas public education in Texas was provided and funded as required by the Texas Constitution. This “solution” was quickly dubbed the “Robin Hood” plan. Problem was, the “wealthy” weren’t bad people, they were our neighbors. Same for the poor, all of us in the end Texans. And in the past 7 years there’s been no girl to get either. All the fuss over public school finance first hit the Texas Supreme Court in 1989, this after the case first spent some time at the trial court and appellate court levels. And it looks like we’re about to go through another round of cases, what with now the fifth case in this series having just recently been decided by the Texas Supremes. Hanging in the balance are ad valorem taxes and the method by which public education is financed in Texas. Any change to the ad valorem tax laws will have a significant impact on Texas real estate. It all sounds simple enough. Article VII, Section 1 of the Texas Constitution says:
From this one sentence, note the following:
To say those terms are a bit imprecise would be a great understatement. But the Court’s role is to determine whether the policies and means set by the Legislature fulfill the last 3 points, and they have not shied away from that role. In order to fund public education, many, many years ago the Legislature set up independent school districts and delegated to them the authority to levy ad valorem taxes, basically a tax based on real property values (and certain business personal property). The current maximum cap on ad valorem taxes is $1.50 per $100 of assessed value. As a result of that method of finance, there is another provision of the Texas Constitution now at issue in these cases, from Article VIII, Section 1-e, which states:
Courts consider a tax to be a state tax when it is imposed directly by the State, OR when the State so completely controls the levy, assessment and disbursement of revenue, either directly or indirectly, that the taxing authority employed is without meaningful discretion. And so the balancing act had begun, delegating the majority of funding for public education to ISDs via their ad valorem taxes, but doing so in such a manner that the ad valorem tax wouldn’t be considered a “state tax.” Texas has historically had a multi-tiered public school finance system. The first tier funded a basic education. In the first tier, every school district that could not, by taxing at a specified minimum rate, generate a certain level of revenue per student in “weighted average daily attendance” (WADA) was given state funds to make up the difference. The second tier provided state funds to guarantee a certain level of additional revenue per student in WADA for each penny a school district increased its tax rate above the prescribed minimum. These school district tax rates were (and are) capped by statute at $1.50 per $100 property valuation. On top of these tiers, smaller components of school finance included the “Available School Fund” established by the Texas Constitution, which provided all school districts about $300 per student, and federal funding. Eventually the state ran out of financial ability to equalize funding from the richer property districts to the poorer property districts. But the courts never considered complete equality to be a constitutional requirement. It requires substantial equality up to a point, after which a local ISD could elect higher taxes to supplement and enrich its own schools. But the poorer districts continued the battle they had begun for more equalized state-wide public school funding. In 1989, the Texas Supremes ordered that state funding of public schools cease on May 1, 1990, unless the Legislature fashioned a system that met the Texas constitutional requirements. It took the Legislature 6 special sessions to pass a new law, one that was immediately challenged and ultimately struck down by the courts in 1991 as still being deficient. At that point, the Legislature was in regular session, and the Texas Supremes required it to respond without delay. It quickly enacted SB 351, creating 188 new “county education districts”. In most instances, a CED included all school districts within a single county. The CEDs were in charge of generating revenue, while the ISDs were still to run the schools. CED tax rates and distributions were set in stone by statute, to ensure uniformity. And while this reduced some of the disparity in funding, it was challenged as, and struck down because it was found to be, a state ad valorem tax prohibited by the Texas Constitution. That opinion came out in 1992. It was the third opinion in this series. The Texas Supremes graciously delayed enforcement of the ruling for more than a year, until the end of the next regular Legislative session in 1993. After first attempting, unsuccessfully, to amend the Texas Constitution, the Legislature passed SB 7, which is commonly known as Robin Hood. It rests on the multi-tiered funding system described above, with required redistribution of certain funds from “wealthy property districts” to poorer districts. Personally, I think this is a good reason to retire the bill number “7" so there can never be another bill like this one. It was a band-aid instead of a surgery. Apparently, now the courts may require surgery. At a minimum $0.86 tax rate, a school district that cannot generate revenue equal to a “basic allotment” per student in WADA [in 1993 this was $2,300, whereas in 2003 it was $2,537] subject to various adjustments, receives state funds for the difference. That’s Tier 1. Tier 2 provides for partially state-supported local supplementation. For each penny a school district raises the tax rate above the minimum, the state guarantees a certain yield per weighted student [$20.55 in 1993, and $27.14 in 2003]. SB 7 equalized school districts’ “wealth per student”, meaning a district’s taxable property value divided by the number of students in WADA. A school district with wealth per student greater than a certain amount [$280,000 in 1993, and $305,000 in 2003] must transfer the excess, or the tax revenue generated from it, either actually or effectively, so as to provide funding for school districts with less wealth. If you wanted to know how Robin Hood did it, now you know. So now what’s the problem? The wealthy school districts are claiming that this system is, in 2003, forcing them to set their ad valorem tax rate at the maximum amount allowable, $1.50 per $100 in valuation, just to meet the state’s minimum requirements to provide their students with an education. They believe they now have no “meaningful discretion” to set their ad valorem tax rates at any amount other than the statutory maximum. Well, these wealthy districts struck out at the trial court level. The trial court said “you haven’t even put enough facts in your pleadings to allow the case to continue.” And the Court of Appeals said the same thing. But then the Texas Supremes stepped in, and in an opinion released on May 29, 2003, said “no, they can get this case to a jury, there’s enough here.” And then they sent the case back to the trial court to proceed. Now, it looks like we’ll have a trial, where the jury can decide whether or not the ad valorem tax has in fact become an unconstitutional “state tax”, with a decision that will, of course, be appealed all the way back to the Texas Supremes, for the 6th time. Just think of all those lawyers fees being paid to fight over a school system whose fundamental flaw is lack of funding. I have been told that never before in the history of the State has a tax burden been moved from one type of tax to another. This was what Lieutenant Governor Dewhurst basically proposed earlier this year, by moving funding from ad valorem taxes to an increased and expanded state sales and use tax. Problem is, that takes a federal income tax deductible tax and moves it to a non-deductible tax. And that’s just the tip of the iceberg. Bottom line? Rumors are rife that the next special session will be called for sometime next Spring, while other rumors hold that deals for change will be brokered from now until one is made, with no special session called until a deal has been cut. Either way, the Texas property tax system is being reviewed as you read this, with changes being proposed all along. I think by the time we “officially” hear about any changes, it’ll be too late to affect the outcome. This is an amazingly complex problem in one sense, while in another sense, that in the fact that somehow, in some way the state must increase the percentage of public education it funds, it’s simple. I suppose we all know where we have to be; the challenge is in getting there. In the meantime, stay tuned to these McTexLaw Email Alerts, and we’ll keep you updated on further developments. And make sure your property appraisals and exemptions are accurate.
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