Spring 2006: Special Legislative Session on School Finance

1. New Tax Laws’ Effect on the Austin CommunityNAPMW-Austin Monthly LuncheonAugust 8, 2006Eva DeLuna Castro, Budget Analyst,Center for Public Policy Priorities

2. Spring 2006: Special Legislative Session on School Finance • Texas Legislature was facing a June 1 Supreme Court deadline to change how K-12 education is funded and give districts “meaningful discretion” in setting local school tax rates • Solution: replace some local school property taxes with state revenue (mostly from “surplus,” higher cigarette taxes, and reformed franchise tax). Tax rate of $1.50 per $100 for M&O will drop to $1.33 by 2006 tax year (an 11% cut), $1.00 by 2007 tax year (a 33% cut). 2

3. Franchise Tax Reform • Doesn’t raise new revenue until fiscal 2008 • Texas corporations and business partnerships earning more than $300,000/year (minus the cost of labor or goods sold) will pay 1 percent or less. • Sole proprietors of any size and small businesses earning less than $300,000 are exempt from the tax (2 times the current $150,000 exemption); businesses owing $1,000 or less are also exempt from filing. 3

4. Impact on Property Taxes 4

5. Other Features of Rate Cuts • Benefits businesses and other property owners, not just homeowners; also means a much bigger cut for high-value property owners (unlike an increase in the homestead exemption) • Doesn’t help those who already had their taxes frozen (like, 65 and over) • 4 cents enrichment: School districts have the discretion to levy up to 4 cents more, without voter approval 5

6. New Spending for Schools Almost all the new state money in the system will go to cut local property taxes; only a small amount will fund these new items: • $2,000/year pay raise for teachers, librarians, counselors, and nurses (includes former $500 health insurance supplement); “pay for performance” incentives • $275 per-student allotment for 9-12 grades to reduce dropout rates, better prepare students for college. Four years of math & science required for HS students to graduate. 6

7. Home Affordability Impact • Example of a $130,000 home in AISD: School taxes at $1.16 rate (versus current $1.623) would drop from $1,866 to $1,334, a 29% savings. But total tax bill (ISD, city, county, hospital, ACC) drops only 17%, from $3,167 to $2,634. Monthly savings: $44 • Using housing-cost-to-income ratio of 28%, this does not significantly increase the affordability of homes 7

8. Higher-Income Households Benefit More • Owners of expensive homes get enough of a local tax cut to outweigh increased state taxes (cigarette tax, franchise tax) • Many lower income households will end up paying more in taxes than they do now; special session made no major changes to regressive state/local tax system 8

9. School Tax Cuts are Not Yet Paid For • For 2008-09 (the next state budget cycle), the actions taken in the special session require the state to spend $19 billion more (a 25% increase in state GR spending), but the tax changes raise only $9 billion in new revenue • This means existing state taxes will have to grow enough to cover the gap; OR, the 2007 legislature will have to raise taxes again or cut state spending 9

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11. Options for 2008-09 • Higher state sales taxes (already among the highest in the nation) • More “user fees” (highway tolls, higher ed tuition, occupational licenses) • Cuts to higher ed. (staff & benefits) and to state employee staffing or benefits (Austin MSA: 11% of wages/salaries are from state govt employment compared to 4% statewide average) • More cost-shifting to local governments 11

12. For the most recent information or to sign up for our free E-Mail Updates, visit www.cppp.org. Center for Public Policy Priorities 900 Lydia Street Austin, TX 78702 Phone 512-320-0222 Fax 512-320-0227 12