The Real Cost of a 2.5% Cap

$30 Billion over 10 years. Do I have your attention? Good, now keep reading.

Texas Governor Greg Abbott put forth a Property Tax Policy on January 16th, 2018, that will get a lot of attention in the new 86th Legislative session. You can read an article about it here, or you can read the full policy proposal here. The element I’m going to focus on is the cap on property tax revenue growth.

Abbott wants to limit the revenue that a city, county or school district can collect from property taxes to an increase of 2.5% year-over-year. This isn’t a cap on what you, the individual, might be assessed or have to pay (which is how Governor Abbott seems to be pitching things on Twitter).

The cap is on the TOTAL that a taxing entity collects. If Cole’s neighborhood (see the tweet above) is hot, and others in town aren’t, he may still see an 11% increase in his taxes every year. If overall assessments in his community are only up 2.5%, the overall district tax rates can stay the same and Cole’s tax bill continues to grow.

But let’s say overall assessments do grow above 2.5% in the community. If the State forces the cap, requiring school districts to lower their tax rate, who covers the shortfall? And how much could we be looking at? Governor Abbott says the State must be ready, but never says how much to be ready for.

From Gov Abbott’s “Property Tax Policy” document

Looking forward, projecting what’s going to happen, can get dicey. But, you can look backwards at what has already occurred. By looking backwards, we can overlay the 2.5% cap onto the growth Texas has already had to determine a strong approximation of what the impact would have been. Doing that modeling can help us think forward.

So that’s what I did. I went to the TEA site and pulled Property Values and Tax Rates, from 2007 through 2017. I’ll dive into the details if you want to keep reading, but here is key element. If the Governor’s 2.5% Tax Revenue cap was in place for the past 10 years, the additional dollars that the state would have had to make up, just to keep our school districts even (cities and counties would have their own costs not included here), would have been approximately $30 Billion. Yeah, that’s right. $30 Billion.

How did I come up with that really big number? You have to look year by year at every district, as the cap applies on a district by district basis. The Texas Education Agency (TEA) has data from the Texas Comptroller that details the property value assigned for school funding as well as the M&O rate (maintenance and operations, or what pays for the things inside the school, rather than the building itself).

Sample of Texas Comptroller data on property assessments and tax rates

I pulled in the property valuations and M&O rates for 1,018 districts, from 2007 through 2017, a 10 year period. I calculated the change to a district’s valuation YOY, for each of the 10 years. To get a one year M&O revenue, take the value assigned for school funding and multiply by the M&O rate. Repeat for all 10 years. Now you have a picture of what uncapped M&O revenues were for a district from 07 through 17.

Sample ISD and Calculating YOY Change

Once we know what the M&O revenues were, we can now overlay the 2.5% tax revenue cap to look at the impact. If the M&O rate stayed the same, and property valuations increased by more than 2.5%, the M&O revenue would be capped at the 2.5% rate, no matter how much the evaluations increased. In the sample below, Bartlett ISD saw their valuations increase from $70 million to $81 million, a 16.3% increase.

Based on their valuations and tax rate, Bartlett’s 2008 M&O revenue was $850,468. Due to the cap, they could only receive $749,280 in revenue. The gap between those two amounts, $101,189 is what the State would have had to cover to keep the district whole.

Let’s quickly dig into a few examples, so that you can see how this would all work out.

Example 1: If a district had a big increase where the cap impacted them one year and then dipped back below 2.5%, you would start to make some of that ground up, per the example below from Abilene ISD.

Note that Abilene had the 8.1% increase in 2008, capped to 2.5%, resulting in a gap of $2,011,771. With rates of 1.2, 0.6, and 1.5% from 2009–2011, the gap closed each year, as the district would have increased it’s revenue by a full 2.5%, even though no individual year in the range had that level of growth. In 2012, the regular M&O Revenue number and the Capped number intersect, where the district no longer has a gap the State would be required to cover.

Example 2: When you have a district with continual growth above 2.5%, all of a sudden the gap starts to compound. Birdville ISD is a great illustration of what I’m talking about. From 2015 to 2016, there is a 9.7% change, with valuations increasing from $7.5 billion to $8.2 billion, resulting in M&O Revenue of $85.6 million. Your 2.5% cap drops that M&O Revenue to $80 million, creating a gap of $5.6 million.

Now, look at 2016 to 2017. You have a second year of growth with valuations moving to $9.1 billion, which is an increase of 10.7%. When you utilize the 2.5% cap on revenue for 2017, it isn’t from the 2016 uncapped M&O target of $85.6 million. It’s calculated from the $80 million. This means the 2017 Capped M&O is $82 million, vs the uncapped $94.7 million. In other words, in 2016, the State would be covering a 7.2% gap. In 2017, the State is covering a 16.2% gap. The gap accelerates quickly.

Once I had the data captured for all 1,018 districts, across all 10 years, I rolled it all up. Here is the impact that the State would have had to cover, year by year.

Texas Statewide What-If

Remember I talked about compounding? 2017 is the prime example. Districts big and small all over the state have seen multiple years of property valuations increasing above 2.5%. The State would have been covering $7 billion in tax revenue gaps. Does anyone think the legislature is up for that? Yeah, me neither.

When you add up all ten years, 2008 — 2017, it comes to just over $30 billion. This is looking backwards. Now, let’s consider forward. Do we expect to see a similar rate of growth in the next 10 years? If so, I can’t see how the gap goes lower if we have a 2.5% cap. And if the legislature decides it isn’t going to cover the full cost to get districts back to even (let alone actually fund schools at a national average level), who carries the burden? Yep, it falls back to the local communities to try and figure it out, or we start slashing what our public schools offer.

Texas on the whole is growing. This is generally a good thing, much better than the alternative that other states are facing. But when Texas grows, supply and demand says that property gets more expensive. This drives up valuations. Many people chose cities and districts based on the services available to themselves and their families, which creates more demand and again drives up valuations. Do we really want to jeopardize our schools and our communities by imposing a state level of control, which will impact the level of services that those who reside in these communities are asking for?

Many in the legislature and our governor talk about “local control”, but they seemingly don’t want to actually give communities and school districts the ability to set their own tax rates and create an environment for continued growth all across our state. This cap will potentially cripple our school districts, as well as our cities and counties. Why would we do that to ourselves?

~Chris

Questions or comments? You can ask me at christackett@icloud.com

PS — I do know things like the funding formula and recapture will impact individual districts, potentially shifting around some of the money between this district or that one, but when looked at in aggregate, dollars are dollars.

Just as a reference, what follows are the 10 school districts who would have had the largest tax revenue gap between 2008 and 2017 that the state would have needed to offset to keep districts whole.

  1. Houston ISD — $1,992,006,762 tax revenue gap
Houston ISD What-If

2. Austin ISD — $1,731,451,618 tax revenue gap

Austin ISD What-If

3. Katy ISD — $891,121,339 tax revenue gap

Katy ISD What-If

4. Northside ISD — $792,559,367 tax revenue gap

Northside ISD What-If

5. Midland ISD — $689,239,758 tax revenue gap

Midland ISD What-If

6. Dallas ISD — $638,977,889 tax revenue gap

Dallas ISD What-If

7. Conroe ISD — $638,835,401 tax revenue gap

Conroe ISD What-If

8. Frisco ISD — $627,329,810 tax revenue gap

Frisco ISD What-If

9. Plano ISD — $571,690,080 tax revenue gap

Plano ISD What-If

10. Fort Bend ISD — $483,219,240 tax revenue gap

Fort Bend ISD What-If