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Texas Schools Feel Pinch

DALLAS - Two years ago, Texas lawmakers passed the largest property-tax relief package in the state's history. This year, Texas school districts are the ones begging for relief as operating costs soar but revenues remain capped under the new funding formula.

Five months before the next legislative session, coalitions are forming, with homeowners and landowners challenging the state's businesses to carry more of the tax load for the struggling schools. At the same time businesses are complaining about tax bills that have risen 500% for some.

Complicating matters further are rising home foreclosures, the prospect of weak growth in property tax bases, a constitutional prohibition against a state property tax, lack of a state income tax that could simplify the formula, and public confusion about how school financing works, officials say.

Thus, Texas is left to equalize per-pupil expenditures across 1,031 school districts that range from third-world poor to astronomically wealthy. And the districts lie in 121 tax appraisal districts led by elected tax assessor-collectors whose assessments face annual challenges.

"If Texas financed roads the way it finances schools, you wouldn't have a road in front of your house," said former state legislator and Republican gubernatorial candidate Ray Hutchison, partner and bond counsel at Vinson & Elkins LLP. In 2006, Vinson & Elkins led a coalition of 18 law firms seeking to mitigate the impact of a new business tax law on their partnerships.

At an education finance summit in Austin last week, school superintendents expressed alarm over faltering funding that's forcing some to dip into their reserves in a form of deficit spending.

"The most compelling statement from this summit was: 'We need help!' " consultant Joe Smith, a former Hudson Independent School District superintendent, wrote on his Web site TexasISD.com. "The financial situation of our schools is worse than you think."

"When a superintendent makes the statement, 'We need help,' he is saying that he sees something he cannot handle alone," Smith wrote. "He also understands before making the statement that some may conclude that the superintendent is the problem. This may account for the silence on the subject."

Indeed, school administrators say they must bear the wrath of taxpayers when taxes rise or when school services decline, even though they have no role in appraising property. This same constituency must approve bond issues for burgeoning schools, even though approval might mean higher taxes. In a pinch, districts must ask voters to, essentially, surrender the tax relief they received under HB 1 in 2006.

HB 1 was passed in a special session of the Legislature after the state Supreme Court ruled that the existing system created an unconstitutional state property tax. Under Texas law, local school tax levies are divided into maintenance and operations and debt service. HB 1 lowered the M&O tax rate from its then-$1.50 per $100 of assessed property value to $1.33. School districts were allowed to add four cents to the rate, and, with voter approval, could add up to 13 cents more. That would take the rate back up to $1.50.

Under the state's so-called Robin Hood provisions, property-rich districts must share their wealth with property-poor districts. However, under the new formula, districts cannot capture much of the rising value of homeowner property; increases in appraised value are capped at 10% of the 2005 values.

Taxes that service debt can be raised if voters approve a bond issue, and districts do not have to share bond proceeds or taxes to service the debt with other schools.

Although the new funding formula was designed to provide more than $1 billion of tax relief - a one-third cut in the collective tax bill - actual taxes for some homeowners could come close to their previous bills.

"We've got a lot of people out there with a lot of pressure on their homes," said Jon Graswich, chief financial officer of the Northwest Independent School District near Fort Worth.

"There's no such thing as a tax cut," he said. "It's a tax shift. If one party is paying 90%, somebody else is paying 110%."

To offset the property tax relief for homeowners, Texas lawmakers created a new margins tax designed to increase revenue from all types of businesses, including services such as law firms and health care providers that had not been taxed in the past.

Businesses also pay taxes on so-called personal property, but are allowed to "render" these values themselves, with no requirement to document how they arrived at the figure. Tax assessors have no real means of challenging the rendered value of, say, Toyota's new truck plant in San Antonio or ExxonMobil's refining operations in Baytown.

In Dallas, taxpayers discovered how undervalued commercial property might be when a parcel of land that the city sought for a convention center hotel suddenly soared in value from the $7.5 million listed on the tax rolls to $36.5 million after a reappraisal requested by the city. The City Council approved an option to buy the 8.3-acre site earlier this year for $41 million, more than five times its previously appraised value.

The margins tax, which is being collected this year for the first time, replaced the loophole-fraught commercial-receipts tax that had been paid by only one out of every 16 businesses in Texas. Revenue from the new tax is running at a pace that could fall about $1 billion short of the $14.5 billion projection, according to figures from the state comptroller's office.

The margins - or business - tax is levied on gross receipts minus employee salaries and other costs. The law caps the tax at 0.7% of its income before deductions. Businesses that have gross receipts of less than $300,000 per year or a total tax less than $1,000 are exempt, as are sole proprietorships.

The Texas chapter of the National Federation of Independent Businesses said the tax is driving away entrepreneurs that the state competes for. More than 40% of NFIB's members will pay 500% more in taxes this year, the federation estimates.

And even though businesses are complaining about the steeper tax bills, school officials say the additional levy is a mere fraction of the break businesses get on the value of their so-called personal properties that include inventories and equipment.

"Is it not a paradox in a state driven by property tax - there's no income tax - that there's no proper rendering of the values?" asked Curtis Culwell, superintendent of the Garland Independent School District. Culwell served on Gov. Rick Perry's 2006 Task Force on Appraisal Reform that struggled to deal with the issue of rising property values.

Ben Coker, assistant superintendent of business services at the wealthy Highland ParkIndependent School District surrounded by Dallas, held a similar position at the Goose CreekIndependent School District in the refining hub of Baytown before joining HPISD. With billions of dollars worth of petrochemicals processed at the city's refineries, placing a value on the property was virtually impossible. ExxonMobil's Baytown refinery is the nation's largest.

"They'd pretty much tell us what their values were," Coker said.

Under the current system, businesses are required to render their values to the county's tax assessor collector. Businesses that fail to do so risk a 10% penalty on their tax bill under a 2003 state law. Assessors can challenge the value provided by the business, but few of the elected officials are willing to risk the political repercussions, according to some tax attorneys.

Richard Matkin, associate superintendent for business services in the affluentPlano Independent School District north of Dallas, deals with major employers such asJCPenney, Texas Instruments, and numerous other high-tech giants operating in Collin County. He suspects that taxable values for those companies is a matter of negotiation.

With home values falling slightly in parts of Texas for the first time and the business environment weakening, the politicking over property taxes could be intense in the next legislative session.

But at last week's summit, Texas Education Commissioner Robert Scott told school officials that he does not expect significant changes to the system in the 2009 session, aside from some kind of inflation adjustment.

The Texas chapter of the American Federation of Teachers called Scott's low expectations for the next session "regrettable," because the number of campuses failing to reach federal performance targets is expected to rise 30% this year.

"These numbers reveal a school finance system in crisis," the teachers union said. "But an urgent crisis response is not what we can expect from the current crop of state leaders. The push for a major school-finance reform that would take care of unmet needs will have to come from below, especially from parents and schoolteachers and allied education staff who see firsthand the damage being done as our schools and students are shortchanged in the state budget."

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