(In)Effective Tax Rate Notices

Texas law mandates nonsensical language for school boards to use when they set the annual tax rate. The forced wording gives inaccurate information to taxpayers, falsely implying that the tax rate and available maintenance/operations revenue have greatly increased.

Despite keeping our tax rate identical to the rates of the last decade, we must use the following state-authored language when setting the tax rate in August 2016: “Move that the property tax rate be increased by the adoption of a tax rate of $1.4156 per $100.00 valuation, which is effectively an 8.70 percent increase in the tax rate.”

The mandatory resolution accompanying that decision also stated: “This tax rate will raise more taxes for maintenance and operations than last year’s tax rate. The tax rate will effectively be raised by 1.68 percent and will raise taxes for maintenance and operations on a $100,000 home by approximately zero dollars.”

That language, dictated by the Texas Legislature, is confusing and contradictory:

  • Our actual tax rate has remained constant over the past decade. We did not raise it at all in 2016.
  • The reason for the language comes from a calculation of what is called the “effective tax rate.” That rate attempts to calculate how much the proposed local tax rate will bring in compared to the previous year, given the increase in local appraisals (the tax base) this year.
  • But here is what makes that calculation absurd: The state’s current funding system for public schools lowers the state’s maintenance and operations funding for each school district in proportion to the amount that local tax revenue increases.  Therefore, local citizens do NOT see the benefit of increased local tax revenue for annual maintenance/operation costs.
  • Thus, the state fails to acknowledge its role in essentially confiscating local taxes by lowering state aid accordingly.
  • Decisions by the state a decade ago froze in place the revenue formula for each Texas school district. If you lived in one of the fortunate few districts that had a good local tax revenue year in 2006, you have reaped that advantage since then. But Pearland ISD has consistently received as much as $1,000 less per child than the average school district since then. So each time the state has increased public school funding in the last decade, such increases were simply placed on top of the frozen formula from a decade ago. The net result is greater inequities than ever across Texas.
  • So what “new” help do we get from the state this year to fund its many mandates and keep up with inflation? We received $8 more per student! We also receive “per student” funding (at a continuing lower level than other districts) for our increased student enrollment.
  • Our Texas Supreme Court was recently compelled to rule on school finance lawsuits. It proclaimed our funding system “byzantine” but “constitutional.”  The court also said it’s really none of its business and it did not want to “usurp legislative authority.” (So it’s unlikely the legislature will soon take meaningful action.)

For paying off debt early, there is a silver lining for Pearland ISD:

  • The other portion of our tax rate called “interest and sinking” is used to pay off district debt for facilities. It’s like paying the mortgage on your house. Since the state gives very little help for such purposes, we can use all local I&S tax revenue without any corresponding penalty/decrease from the state. So as values increase in our district, we collect more I&S revenue at the same tax rate. That helps us keep our tax rate reasonable and can be used to pay off debt early, saving millions. (That was done in 2015 and will happen again in 2017.)
  • Families and businesses flock to high-performing school districts like Pearland ISD.  The website WalletHub just rated Pearland’s educational system fourth best in the entire state — and that ranking helped designate the City of Pearland as among the top 10 cities for families in Texas. Such accolades draw families and businesses who share the tax burden. So while people in Pearland do see their tax appraisals go up, the market value of their houses also increases. In the same way, this benefits many local businesses.

Despite accolades for high achievement and financial efficiency (including a five-star rating from the state comptroller) in Pearland ISD, much of what the local citizens giveth, the state taketh away. Thus, the tax rate language dictated by the state obscures that truth.

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