Stop the Shenanigans or I'll Shoot — Tax Reform Texas Style

It stands to be quite an interesting year in Texas taxation. In late November 2004 a Texas district court judge in Austin declared the Texas public school finance system unconstitutional and enjoined the State from funding public schools, but stayed the injunction until October 1, 2005 to give the Legislature time to attempt to fix the tax system. See West Orange-Cove Cons. Indep. Sch. Dist. v. Neely, No. GV-100528 (Tex. Dist. Ct. Nov. 30, 2004, pet. filed). Unless it is overturned by the Texas Supreme Court, the ruling effectively represents a gun to the head of the Legislature to fix the Texas tax system once and for all. The Texas courts have apparently had enough of the shenanigans that hallmarked the attempts to reform the Texas tax system during the last legislative session. Leaders from the legislative and executive branches are already floating their ideas for fixing the tax system.

Background

The Texas school finance system has seen its share of litigation over the last several decades. The West Orange case is the fifth case involving a constitutional challenge to the system that has reached the Texas Supreme Court. See Edgewood Indep. Sch. Dist. v. Kirby, 777 S.W.2d 391 (Tex. 1989) (known as Edgewood I); Edgewood Indep. Sch. Dist. v. Kirby, 804 S.W.2d 491 (Tex. 1991) (Edgewood II); Carrollton-Farmers Branch Indep. Sch. Dist. v. Edgewood Indep. Sch. Dist., 826 S.W.2d 489 (Tex. 1992) (Edgewood III); Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d 717 (Tex. 1995) (Edgewood IV).1

At the heart of these disputes are two provisions of the Texas Constitution that, in certain respects, are inconsistent with one another. One provision requires the Legislature to establish and make suitable provision for the support and maintenance of an "efficient" system of public free schools in order to the promote "[a] general diffusion of knowledge,"2 while the second provision states that "[n]o State ad valorem taxes shall be levied upon any property within this State."3

Texas public schools are funded mostly by ad valorem taxes levied by local school districts under comprehensive state regulation. In the past, the Texas Supreme Court declared the public school finance system unconstitutional because, due to varying degrees of property wealth from one district to the next, the amount of funding varied too much from district to district,4 prompting the Legislature to enact a "county education district" scheme in which the school districts within a county were effectively consolidated and the tax base for the county distributed more evenly among the school districts, all under the control of the State. The Texas Supreme Court declared that funding system unconstitutional, not because it was inefficient or resulted in a disparate level of funding per student, but instead, because it was in effect an invalid State property tax.5 According to the Edgewood III Court, "[i]f the State mandates that a tax be levied, sets the rate, and prescribes the distribution of the proceeds, the tax is a state tax, regardless of the instrumentality which the State may choose to use."6

The Legislature responded by enacting the "two-tiered" funding system that generally remains in effect today. Under Tier 1, school districts receive state funds to close the gap between the minimum tax rate and the "basic allotment" per student. Under Tier 2, for each penny a district raises its tax rate above the minimum, the State guarantees a certain yield per weighted student, and the tax rate for maintenance and operations is generally capped at $1.50. Unlike the former "tiered" systems, the current funding system contains a "Robin Hood" element under which a district with wealth per student greater than a certain amount must transfer the excess, or the tax revenue generated from it, so as to provide funding for school districts with less wealth. Local tax revenue "recaptured" and redistributed by this mechanism amounted...

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