Education Policy

Public Schools Have a Revenue Problem, Not a Spending Problem

With school districts across Texas rallying against drastic budget cuts, many elected officials and critics of public schools have tried to cast educators as being responsible for the situation they’re currently facing. These critics charge that schools need to learn to be more efficient with the resources they have and that more competition and accountability is the only way to ensure that educators feel the pressure.

However, when you look closely at the primary tax structures that are supposed to prop up our schools, a different picture emerges: one of shortsighted, politically motivated decisions that have undermined public education in this state for years.

One of the most significant revenue problems within the current school funding system centers on a reworked franchise tax — commonly referred to as the margins tax. This new tax was originally conceived in 2006 as a way to offset a one-third reduction in school district property tax rates. This $14.2 billion loss in local revenue to schools would be recuperated by expanding the franchise tax so it would also apply to all businesses other than corporations and those with similar legal structures. A $1 increase in cigarette taxes and changes in the calculation of the taxable value of used cars would also help make up the difference.

Though analysts at the Legislative Budget Board and the Comptroller’s office repeatedly warned legislators that these revised taxes would fall short of the $14.2 billion loss, only bringing in around $8.3 billion over the next two years, proponents of the change assumed that Texas’ “miracle” economy would spur enough business activity to make up the nearly $6 billion difference.

They couldn’t have been more wrong.

Not only did the margins tax fail to live up to legislators’ impossibly high expectations, because of the recession, it failed to even meet analysts’ more conservative projections. In the 2008-2009 biennium, the margins tax only brought in $3 billion. Combined with the other two tax tweaks, this covered just over one-third of the total cost of property tax relief. This deficit has gone uncorrected ever since.

Even more frustrating, the “property tax relief” that the margins tax was supposed to ensure has also failed to materialize. In the decade before 2006, city, county and special district taxes rose at about the same rate as school taxes — roughly 7 to 8 percent each year. However, once the legislature mandated the property tax reduction for schools, these other local taxing entities began picking up the slack, and in the years after, their average annual tax increase ticked up to about 12 percent, all while schools’ rates have remained statutorily capped.

And while schools were struggling to adjust to this new normal, the legislature was giving billions of dollars in tax exemptions to the natural gas industry. According to an LBB report not made public until last year, although gas production was at a historic high in 2009, the amount of tax revenues received from natural gas companies was the same as in 2004. This is particularly important for schools, since 25 percent of tax revenues received from the natural gas industry are directly allocated for public education. In fiscal years 2010 and 2011 alone, these exemptions cost schools more than $2 billion — enough to fund the cost of annual enrollment growth during that time.

This lost support for local schools is due to a special provision in Texas law intended to incentivize energy companies to explore “high-cost gas production.” However, because a loophole in the law allows any well operating within the 5,000 square miles of the Barnett Shale to be classified as “high-cost,” a $24,000 gas well managed to qualify for the exemption. The median cost of a well that year was $2.3 million.

In fact, out of all 5,967 wells completed in 2009, only 10 paid anything close to the 7.5 percent tax rate for natural gas that is on the books. In 2011, almost 75 percent of all gas wells in Texas qualified as “high-cost.”

Where are the free-market purists demanding that these companies find more efficient ways of doing business that don’t require special loopholes? Why are market-based reforms being demanded of educators in public schools, while private energy companies reap the benefits of government handouts? We hold our public schools to enough standards — it’s a bit much to ask them to live up to these double standards as well.

Simply put, a quality education system requires a meaningful, sustained investment from all of us, because all of us benefit from it — even dogmatically anti-tax lawmakers and loophole-exploiting energy companies.

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