TEA continued its series entitled “HB: 3 in 30” with an explanation of how tax rates are changing under new education legislation.
The tax compression required under HB 3 helps implement 2 of the Texas commission on public school finance’s major recommendations:
- Create a long-term systematic balance between the state and local share of district foundation funding for public education
- Significantly reduce the growth rate of property taxed and reliance on recapture as a method of finance for the state
What are the components of my M&O tax rate under HB 3?
- HB 3 re-set how the M&O tax rate is divided into funding tiers
- The tax rate is re-ordered
- The Tier One tax rate is based on the first $1 of tax effort, compressed to 93%
- The enrichment tax rate is for tax effort above the tier one tax rate and is divided into 8 golden pennies and up to 9 copper pennies
- For TY 2019 the Copper Pennies will be compressed by the ratio of the old law copper penny yield of $31.95 to the new law copper penny yield of $49.28 for School Year (SY) 2020
Components of M&O Tax Rate
- Pennies adopted in Tax Year 2018 in response to disaster:
- Exclude these pennies from your TY 2019 tax rate
- Tier One tax rate:
- The lesser of your 2018 adopted M&O tax rate of $1. Multiplied by 0.93
- Golden Pennies:
- First 8 pennies above the 93 pennies
- Copper Pennies:
- 9 additional pennies above the Golden Pennies. Multiplied by 0.64834.
- Additional un-equalized pennies:
- Certain districts authorized by special law which taxed above $1.17 in TY 2018 will still have un-equalized local tax effort
How do I set my 2019 Tax Rate in compliance with HB 3?
- You must compress your M&O tac rate for tax year 2019
- Section 5.002 of HB 3, on page 302 of the bill requires districts to compress their tax rates in compliance with the bill for the 2019 tax year regardless of whether the district has already calculated or adopted a rate before the effective date of the bill
- The tier one tax rate must be compressed by 93% (multiply the lesser of $1 or your 2018 adopted tax rate by 0.93)
- Up to 8 pennies will be considered golden and exempt from compression
- Any remaining copper pennies after reordering must be compressed by 0.64834
- The voter approval (rollback) tax rate is set to the sum of 93 cents plus: the greater of 4 cents or the district’s enrichment tax rate after tax compression
- For districts which adopted a tax rate of $1.04 or above in TY 2018 the voter approval tax rate will be equal to their 2019 tax rate after compression
- Districts which had tax rates below $1.04 in 2018 will be able to increase their tax rate up to 97 cents in TY 2019 without having an election
- Districts are generally prohibited from adopting an M&O tax rate above the voter approval tax rate for 2019
- How many decimals can my tax rate contain?
- Although a district can adopt a tax rate with a greater number of decimals, the agency, in calculating funding under the FSP, will round down to 4 decimal places. This has been a long-standing agency practice.
- Key Point: Tax rates with more than 4 decimals will not have the additional fractions of a penny recognized for state funding purposes.
- What happens if I don’t compress my taxes in compliance with HB 3?
- The agency, in calculating funding under the FSP, will reduce state aid or adjust recapture in an amount equal to the amount of revenue generated by a school district’s tax effort that isn’t in compliance with HB 3.
- Key Point: The district will not benefit from the additional tax revenue. The district may be liable for other civil remedies for failure to appropriately reduce tax rates.
- What if I have already adopted by 2019 Tax Rate?
- The district must re-adopt its tax rate to be in compliance with HB 3.
- Key Point: Having adopted a tax rate prior to the passage or effective date of HB 3 doesn’t exempt the district from the tax rate compression requirements of HB 3.
Exception to 2019 Tax Rate Increase Prohibition
- Districts with a 2019 tax rate after compression of less than 97 cents (which translates into a 2018 adopted tax rate of under $1.04) are allowed to increase their tax rate up to $0.97 without holding an election.
- This allows everyone to access a full basic allotment in Tier One as well as 4 Golden Pennies without holding an election.
- The opportunity to access golden pennies without an election continues in subsequent tax years, with an additional golden penny
- Districts boards that took specific action to begin a TRE prior to January 1 may be allowed to continue to access additional pennies, as compressed
- Disaster exceptions continue to apply
There are currently 91 different M&O tax rates in Texas.
- Effective January 1, 2020, requires Efficiency Audits before a district seeks voter approval for increasing tax rates. LBB establishes guidelines. Districts must select the auditor at least 4 months before the scheduled tax increase election date; the audit must be completed and posted on the district’s website at least 30 days before the election.
- New statutory language clarifies that a school district may not increase the M&O tax rate in order to create a surplus for the purpose of paying the district’s debt service.
- Tax Ratification Elections (TREs) must happen on uniform election days.
- Bond election notices must include “THIS IS A PROPERTY TAX INCREASE” language
TEA Next Steps
- TEA has posted a state funding template
District Next Steps
- Districts must adopt their 2019 tax rate in compliance with HB 3
- Districts which have already adopted their tax rate for 2019 must re-adopt their tax rate if it’s not in compliance with the tax compression required in HB 3