The Commission heard invited testimony regarding sources of special education funding and property tax policy and issues.

This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. This report is not a verbatim transcript of the hearing; it is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

Opening Remarks

  • Brister- apologized for the controversy surrounding special education comments made in workgroup
  • Brister- unsure if working group method is the most appropriate method to maintain transparency and effectiveness. Would like to make working groups an in-person meeting. Would like to postpone working group reports until the end of summer/early fall
  • Brister- reviewed multiple public comments and requested any public comments be sent it to be reviewed and considered

 

Sources of Education Funding

Leo Lopez, Chief School Finance Officer, TEA – Sources of Education Funding

  • Gave presentation
  • Reviewed FSP funding sources
  • Data shows recapture as state funding
  • All funds have increased over the previous biennium by 6% largely due to property tax increases
  • Bettencourt- noted that the data shown was represented by biennia
  • Reviewed local funding sources
  • Total local M&O funding over $51.2 billion for 18-19 biennium
  • Points out sub-section 4 of the education code which says state funds should be the amount sufficient to finance cost of each district’s Foundation School Program not covered by other funds
    • System by design looks to local property taxes first
  • Reviewed total collections of local property taxes, $4.6 billion in recapture which will be referenced as appropriated receipts
  • Huberty- LBB presented that recapture payments are local taxpayer dollars, how are you able to suggest that recapture are not local?
    • The purpose of the slide is to reconcile the appropriations act
  • Brister – not a choice local people have
    • Huberty – by state law they don’t have to send it in, in theory it really is local dollars
    • Huberty – wants the discussion to be consistent
    • Brister- the burden is on local taxpayers, but should probably be considered as state revenue but the same thing may be said about sales tax
  • Kara Belew, TEA – TEA has no opinion if recapture counts as local or state funding, recapture is counted as state funds in order to make sure it’s the same number as appropriations
  • Huberty – presentation skews representation regarding state spending
  • Bettencourt – don’t have a statewide property tax system, have a local property tax system and 100% of the bill is paid by the taxpayer
  • Huberty – gets that funds are coming in and being re-appropriated, “facts are tough things to dispute”, need to make sure we are not saying something that is not true
  • Bernal – invites the committee to visit schools within his district, agrees with Huberty, part of the debate is how much the state is willing to do after the fact, asked LEO regarding methodology
    • Look at local share, formulas look at local share first
  • Johnson – agrees with Huberty and coming off a Property Tax Town Hall yesterday evening, having to be on front line answering these questions – so if now adopting practice of adopting local property tax as state portion then needs to be clarified on bill and it’s a matter of education and transparency
    • Brister – complaints will then fall on the state legislature and that will not increase state funding if people are yelling at lawmakers
    • Brister – does not have a problem saying it is not our fault, the state is taking it away but then the state can say courts said we have to take it away
    • Taylor – can reduce recapture but unless we do an entirely different system property tax will not go away and still at end of day some will be paying in more
    • Taylor- LBB numbers did not include anything outside the formulas such as the instructional materials allotment or TEA administration about $2 billion that the state is not getting credit for based on what they are appropriating
    • Taylor – thinks taxpayers should know but it is the way the system is
    • Brister – it’s the court fault so he volunteers to come to property tax meetings
    • Killian – how are we going to define state versus local portions and keep those definitions consistent when doing a comparison over time
  • Not his intent to misrepresent state versus local
  • Continued to walk through finance slides that covered major revenue sources of state funding
    • FSF (Fund 93), Recapture, Property Tax Relief Fund, Available School Fund, and Lottery Proceeds
  • Reviewed total state funds for non-FSP related educational expenditures: instructional materials and allotments, Windham School District, Assessment, Regional School for Deaf, others
  • Brsiter – asked Lopez to give a brief overview of the Windham School District
  • Taylor – asked about assessment cost, $91.7 goes to the biennium?
    • Yes
  • Reviewed federal funds going to things like child nutrition, Title I and IDEA
  • Williams – asked about TEA administration cost, about $145 million a year
    • More or less
  • Williams – will part of the conversation be about how funds are invested, would like to understand about investment of certain TEA monies and how aggressively they are invested
  • Taylor – fund set up through GLO
  • Ellis – majority goes through SBOE and its very diversified
  • Bettencourt – can we track across all the school districts philanthropy and donations?
    • No clear way to track at a state level
    • Bettencourt – have heard pretty amazing stories that may be only pure local money
    • Brister – how LBB reports its figure to TEA and maybe want to consider on recommendations for the best way to report things like this but postpone discussion on this until we get further along

 

Tax Policy Issues

Tom Currah, Comptroller of Public Accounts  – Texas Tax Revenues: Recent Trends and Outlook

  • Gave overview on Biennial Revenue Estimate process
  • Reviewed state tax revenue by sources – franchise tax has declined
  • Brister – wants to know how natural gas taxes were reduced since we are producing so much?
    • Reflection of decline in price and production was lower last year
  • Pointed out various volatility in sales tax
  • Bettencourt – clearly from revenue collection system the volatility is why we have a property tax system
  • Williams – when start trading off property taxes, volatility is concern asked about property tax fluctuation
    • Not immune, it did decline one year
  • Reviewed economic performance in Texas
    • Have returned to economic growth exceeding the national rate
  • Bettencourt – what percentage of increases are Harvey related?
    • Built-in projections for bump after Harvey, they have seen it but not as high as they anticipated
  • Points out uncertainty in revenue estimate by using illustration of fluctuation of oil price
  • Points out 5.4% growth predictions in GR is lower, notes the funds being Constitutionally dedicated to the State Highway Fund will add constraints to available GR
  • Revenues are currently ahead of the estimate but too early to project how much revenue might be available for the 2020-21 budget cycle
  • Noted the expended amount we will have starting off this biennium is $94 million, markedly less than previous sessions
  • Johnson – inquired about property tax growth
    • Do provide projections to the legislature at two times (based on trends and what they see in the economy such as population growth) but they don’t have to use them
  • Bettencourt – see Texas being in a hole by $11.4 billion coming into 86th Session
    • Probably some other cost not on here like CHIP cost so that could be another substantial cost
    • Bettencourt points out no decline on alcohol tax and said his joke is if we want to base funding on a tax that is steady would be alcohol

 

Phillip Ashley, Comptroller of Public Accounts

  • Reviewed his portions of the slides on public education expenditures and the State’s cash flow
  • Spoke on the details of the UnRestricted General Revenue Daily Borrowing
  • Brister – is borrowing to make up for property taxes not coming until the end of the year
    • General understanding, determined by statute the amount allocated to districts so they get 50% of their allocations at the beginning part of the month
  • Brister – not proposing this but if school financial year was same as the calendar year would there be a match and borrowing go away
    • Johnson – doesn’t really make a difference because expenditures are driven by instructional year, slide 21 illustrates districts getting state aid not all districts
    • Johnson – school districts face same challenge
    • Bettencourt – need to bust the myth that state has all the money and district does not, he has asked what is fund balance so when looking at draw down rate need to bust meet that state is sitting on pile of cash not distributing
    • Bettencourt – proposes change in calendar to help with cash flow calendar, with different type of fiscal years causes need to borrow earlier
  • Bettencourt – presentation shows that state has to borrow money early in fiscal year and myth that needs to be busted is that state has significant cash flow issue at this point in time, if don’t change current system and how long will current school structure last (3 years argues Bettencourt)
  • Johnson – all facing sort of similar challenges
  • Bettencourt – long term is that testimony is schools have money on reserve cycle ahead of the state
  • Johnson – some would argue state sitting on reserves on Rainy Day Fund
  • Ellis – would like to also bust the myth that schools are sitting on pile money
  • Killian – districts are different, some districts don’t have any reserves and some districts must tap into their fund balance to make it work
  • Bettencourt – we all have to use reserves
  • Killian – would also say we all have to have reserves
  • Bettencourt – have just seen fiscal state of Texas
  • Bernal – can we get a list of dedicated funding streams that would have gone to education that have been cut – curious how much of this have we done to ourselves
    • Can figure it out and get something to the Commission
  • Taylor – should we change timing on when revenues come in, if we could adjust timing perhaps it would save on interest
    • It is a trend if looking at last 4 years, if unrestricted general revenue balance were to grow there would be less reliance on borrowing
  • Williams – points out dedicated RDF and working capital, how is RDF invested?
    • Has a little over $11 billion in it and about $7.5 billion sitting in treasury pool and required to be there by statute and required to be liquid but is invested as pool
    • In 2014 Comptroller can invest a portion above the sufficient balance
  • Killian – agrees with Johnson’s statement about some districts have to float cash flow and need to remain cognizant of those differences moving forward
  • Johnson – would like a history of local property taxes with the actual numbers

 

Anette Nellen, Tax Executive Committee of the American Institute of CPAs – Principles of Good Tax Policy

  • Reviews slides on principles of good tax policy
  • Bettencourt – question on if tax policy changes behavior?
    • It does but should not design one that will
  • Huberty – sales tax in regards to the location of vendor, what about online sales?
  • Brister – do other states have no sales tax exemptions?
    • They have exemptions but not holidays
  • Johnson – were are taxes on advertisements and banners and what about fuel-efficient cars?
    • Advertising would primarily be purchased by business, but would not advocate for sales tax on advertising because it is purchased by businesses
    • Some areas are tracking things like vehicle miles traveled
  • Taylor – concerned on internet, internet tax freedom act but used to tax phone service so not sure where things are headed with this, believes internet sales have surpassed brick and mortar
    • It does continue to grow
    • Taylor – need to tax online sales to be fair, is there any way to tax internet ads?
    • Thought law said if tangible item gets tax so would internet version
    • In regards to restriction on internet access fees, law that cannot access those fees and most states were not taxing it but it’s a federal constraint
  • Johnson – asked more questions on franchise tax vs property tax payors
  • Brister – against state income tax but asked if data suggests if states without income tax are more attractive to businesses and what about a state with high property tax?
    • Need to look at mix of factors

 

Property Tax Problem

James LeBas, Former Chief Revenue Estimator – Turning Points: Modern Property Tax Property Developments in Texas

  • Paper lays out four pivotal turning points: Peveto Bill, Gov. Bush undertaking, Texas Tax Reform Commission resulted in M&O buy down but current structure means this is no longer felt, and “today”
  • No magic formula has been devised, nothing for free
  • Bettencourt – the money the legislature appropriated to this, taxpayers are paying less for an enormous buy down that the legislature did not get credit for
    • Value is still there just becoming harder to see
  • Ellis – can you speculate without buy-down where value growth would have gone? What is happening in values is being driven by the market?
  • Brister – in response to a question on the comparison of taxes may be challenging, Williams curious on the total tax burden
    • Williams – not just being the lowest cost but having an educated workforce
  • Bettencourt – New York just adopted a 2% rollback rate but there is a tremendous amount of winners and losers in the process and split tax rule is really a problem picking residential vs commercial
  • Johnson – asked about the increase in tax rates? Counties and cities can’t exceed rollback rate, wonder if there is an ability to respond to market fluctuations because currently no incentive to lower
    • School districts need to have a TRE any time they want to raise the rates, not many rates increasing anymore
    • For cities and counties there is a bit more room
  • Bettencourt – to his disappointment many elected officials are saying they are not raising the rate which ignores increasing value

 

Property Tax Problem Panel- Cont. After Break

Nathan Anderson, Ropes Gray

  • Gave Presentation
  • States use different terminology to describe similar actions- makes comparing Texas to other states difficult
  • Market Value system
    • Legal rules include defining the taxable value of property and setting parameters of local access to property tax base
  • Discussed formulas of tax liabilities and government revenue
  • Property tax is a method of cost sharing
  • Defined tax base
    • Market value determines the taxable value of the property
    • Taxable value is measured each year
    • For most properties, the measure is an estimate because market value is not observed if the property is not sold recently
  • Defined Parameters of access to tax base
    • Unfettered access to Tax Base
    • Step 1: Government requests an amount of revenue (“requested revenue”)
    • Step 2: measure taxable values and add them up to get Tax Base
    • Step 3: tax rate is set so that it yields requested revenue
    • Step 4: tax bill = (tax rate) x (taxable value)
  • Property tax is a residual tax for ISDs
  • Unfettered market valuation system challenges
    • Administration
    • Distribution of taxes
    • Complex and undesirable changes in tax payments – individual shares can change, and amount requested can change. Even if the requested amount stays the same, individual share can change
    • Local decisions made by governments and voters
    • Easy to make false inferences about the system by the individual
  • Governments have tried to limit access to unfettered market valuation system- oversight by state
  • Tax limits: tax rate limits, tax revenue limits and assessment limits (constrain local government decisions/local tax revenue)
  • Discussed policy responses within the tax system
    • Tax rate ceiling, revenue ceiling, assessment ceiling, tax exemptions, increased transparency
  • Some state try to make more property tax information available to homeowners
  • Discussed historical trends in assessments
  • Taylor- do you have an explanation for why appraisals were going up at a higher rate than value?
    • Local assessors were not assessing at market value
  • Taylor- but it seems as though tax revenue has stayed the same?
    • Tax rates were reduced or kept revenue request fairly constant
    • Bettencourt- would be a more complete assessment if the last 25 years were included
  • Discussed historical trends of tax rate limits
    • Few states only have an assessment limit
  • Should take away
    • Property tax is a residual tax even with restrictions
    • Think about cost-sharing within school districts
    • A pure market-based system may achieve uniformity but may be unacceptable to taxpayers due to uncertainty
    • Help public better understand the property tax system
  • Brister- most states do not have a statewide property tax?
    • Correct but if they do it is very small
  • Brister- a property tax cap shifts the burden from between taxpayers?
    • Correct, but helps distribute tax increases
  • Bettencourt- did you cover a tax expansion limit?
    • That means an expenditure limit in addition to the previously mentioned items
  • Williams- have there been regional studies of appraisal appeals?
    • Only seen specific areas in the country, not regionally
    • Not sure to what extent that shifts taxes from a more highly valued home to those with less valuable home
  • Majority of states have real estate transfer taxes and are not non-disclosure laws
  • Williams- Texas is in the minority of states in that regard?
    • Correct
  • Conley Johnson- why are states reluctant to set a state property tax if they set the associated policies?
    • Many state property taxes were eliminated during the great depression

 

Kevin Kieschnick, Nueces County Tax-Assessor Collector

  • Gave Presentation
  • Discussed Prevato Bill (1979)
    • Allowed for consolidation ox tax system for efficiency
  • Reviewed differences between appraisal district and a tax assessor-collector
  • Overview of current collections phase (phase 4) October-January
    • Oversees delinquent tax collection
    • The assessor cannot waive fees
    • Penalties for past due taxes can be over 36%
    • Delinquent taxes can result in foreclosure by the financing institution
  • Reviewed when delinquencies occur
    • Over 65 deferrals,
    • Have a large impact on budgets
    • Many people find themselves in a delinquency rut that they cannot get out of
    • Foreclosures result in a shrunken tax base
  • Briefly discussed hurricane effects on tax collections
    • Disaster quarter pays instituted after the disaster declaration
    • Increases burden on taxing units
    • Cash flow decreases cause issues when there is a higher demand for services
    • Future values fluctuate dramatically- usually in 3 years: due to new construction and updating to new codes
    • Demand for property goes up which causes an artificial increase in property values
  • Non-disclosure on appraisals causes a problem in the system
    • If the tax system is based on market value, the baseline should be the market value of the property
    • Lawsuits regarding appraisals etc. cause a substantial cost to the state
  • Taylor- it’s a comparable values issues
  • Bernal- curious how the disclosure would affect the process?
  • Taylor- discussion of the majority of property owners being commercial properties and causing a domino effect of reappraisals and a district having to write checks back to adjust for the change in appraisals
  • Bernal- would a disclosure law provide better clarity?
  • Bettencourt- many counties can but listing information from MLS
  • Huberty- discussed tax increase on commercial properties s essentially a tax on businesses
  • Bettencourt-were there any disaster reappraisals after Harvey?
    • Not in Nueces County
  • Bettencourt- those properties are not worth what they were before the disaster, have you advocated for a reappraisal?
    • Yes, looking for ways to expedite this process
  • Conley Johnson- what is the structure for setting your budget?
    • Have a per parcel budget which breaks down the actual cost of the appraisals divided by the number of parcels
  • Conley Johnson- would like to consider that issue for districts which go through the reappraisal process
  • Taylor- discussed written testimony, what is the 44.62%
    • Will get a specific response
  • Killian- Had a discussion regarding commercial properties but more concerned with residential property value assessments, should be the most accurate data we can get
  • Brister- requested staff to investigate how many counties/states offer some way to get market research on property values

 

Property Tax Payors Panel

 Bob Adair, Phillips 66

  • Gave Presentation
  • State and local taxes are a significant factor in business capital investment and operations decisions. Property taxes are a large portion of SALT
  • Shared example of a school with dual credit as good news after HB 5
  • Discussed top 10 and bottom 10 business tax states
  • Showed depiction of a wide variety of state and local tax structures
  • Business tax is significantly higher percentage of state and local taxes in Texas than the national average
  • Brister- looks like property tax and sales tax are the majority of state and local taxes?
    • Many other states have income taxes which drive down the other inputs
  • Killian- our business taxes are 40% above the average?
    • Correct
  • Texas has an inventory tax unlike many states
  • Most states have discretionary tax abatements
  • Briefly discussed other property tax concerns
    • Stability and transparency
    • Compliance burden
    • Valuations
    • Appeal process- uniform, efficient, and timely
    • Local government budgets
  • Briefly reviewed a typical property tax model used for new projects
    • Creates an estimated tax used to assess competitiveness
  • Taxes and property taxes are brought in very early in a typical capital investment decision model
  • Suggested rules:
    • Taxes matter to business, and affect decisions
    • States do not make decisions in a vacuum- every tax law can make a state either competitive on the national stage
  • Bettencourt- clear that businesses do use SALT in decision making for capital investment and economic analysis
  • Williams- asked for insight to the educated workforce on decision to locate in a certain area?
    • There are many additional factors
  • Killian- does income tax affect your decision?
    • Property tax is a bigger factor, but it does come into play in modeling

 

William Blaylock, Texas Instruments

  • Discussed TI business split between domestic and foreign
  • For the most part, product is built in Texas and sold elsewhere
  • Paid $29 million in property taxes last year
  • Any form of tax is cost and effects behavior
  • Future property taxes reduce future cash flows
  • Property tax is relatively stable and has a relatively stable tax base
  • Relatively easy to enforce collection of property taxes
  • Tax does not apply to intangible property- consideration should be for the trend of moving toward a service-based economy
  • Businesses paid $31.4 billion in property tax Ernst Young survey
  • Discussed highest property tax rates cities across the country, and Texas had 4 of those cities according to report
  • Briefly discussed the number and amount of deferrals and exemptions in property tax
  • The burden of property tax should be broadly applied to all property owners
  • Other suggestions are noted in testimony
  • Conley Johnson- what suggestions do you have for providing relief?
    • Do not have a proposal or advocating for any decision but would like to be a resource
  • Killian- would you assess the impact of going toward an income tax versus a property tax
    • Those are things that are already taken into account in assessment models

 

Justin MacDonald – Texas Association of Builders

  • Discussed the TAB
  • Explained why schools are so important to the residential market
    • Need to advance more CTE programs across Texas
  • There are many factors that are not affected by government actions
  • Housing unit pricing tax burdens include materials, and property taxes
  • Rising property tax burdens directly increase housing unit prices
  • Property tax burden on homeowners directly influences the ability to upgrade, remodel, or maintain their home as well as determining whether or not to buy or rent
  • Property taxes get passed on to renters as well which causes an increase in rent prices
  • Believes that a strong education is important to the building market, but the tax burden shouldn’t be born solely by property owners
  • Williams- mentioned 63% of builders indicated a labor shortage?
    • Correct, difficult to say exactly how much that effects cost of building
  • Williams- what skill sets are you finding shortages in?
    • HVAC
    • Electricians
    • Welders
    • Framers
    • Some do require a post-secondary degree or certification

 

Patrick Terry – Founder, Owner and Operator at P. Terry’s Burger Stand

  • Discussed P. Terr’s business principles
  • Don’t own any property but do pay property taxes for the landlord
  • Have a 42% increase in property taxes in 2018 over 2017
    • That kind of property tax increase limits options for giving back to the community and taking care of employees as desired
  • Could limit future small business creation due to these financial restrictions
  • Would expand large chain restaurants over small business
  • Bettencourt- you realistically have a doubled tax bill in 2 years, correct?
    • Correct, the percentages will continue to grow and will continue to limit growth
  • Huberty- discussed raising property values and paying property taxes on a building that isn’t owned by the payer if market values are used. Value of p. terry burger cannot go up at the same rate to keep up with property tax rates
  • Conley Johnson- bulk of increases benefit the state through recapture
  • Brister- discussion of school closure due to eliminating recapture
  • Bettencourt- data shows that other entities are gaining more than ISDs by not limiting tax rates

 

Wayne Gerami – Vice President of Client Services, Austin Habitat for Humanity

  • Gave Presentation
  • There is a staggering difference between income and price of single family homes
  • Gave an example of a family with a high tax rate
  • In 1997 we purchased two lots on the East Side for $22,000. Those empty lots are not appraised at $1.1 million. That is the staggering increase.
  • Recapture accounts for a large majority of the increase
  • Have had to help relocate families from east Austin because their property taxes are significantly higher than their original mortgage
    • Forces families out of neighborhoods that they build
  • Discussed deed restrictions that limit property tax growth
  • Written testimony provides additional information on valuation practices
  • Experiencing
  • Williams- how active is the home equity market in Austin?
    • Do not have data on the market, but most families do not have increased income and have limited access to gain from equity in home
  • Brister- what would you do to solve this issue?
    • Circuit breaker provisions would benefit families that we serve
    • Blaylock- most of the time that is done off of income to integrate property tax and personal income tax
  • Brister- is it a wash if we raise sales tax to replace dollars in property tax?
    • Blaylock- there are behaviors involved, sales tax is more volatile than property tax making it riskier. Eliminating exemptions to get closer to sales tax would eliminate cascade/domino preventions of passing costs down
    • MacDonald- would be concerned about that cascading effect in addition to home costs
    • Burden isn’t just felt from the property tax
  • Taylor- Austin is unique in this issue and difficult to use for a state-wide comparison, and there is a need to keep the whole state in mind in this process
  • King- seems like the property tax issue is a solution looking for a problem, the funding situation needs very specific school finance and where that money is going to come from
  • Bettencourt- how long has your (King) district been in recapture?
    • King- 25 years
  • Bettencourt- so you have seen the issues facing Austin for many years now
    • King- correct
  • King- there is a need to cap recapture as opposed to eliminating it

 

Closing Remarks

  • Wise to push working group reports later
  • Will have additional witness testimony in upcoming meetings