School Funding Caught Up in Tax Reform Battles


Legislators in at least two-thirds of the states this year are considering overhauling the way they fund elementary and high schools. But efforts to fix school finance are liable to run aground in states where the remedy necessitates tax reform.

One such state is Texas, a prime example of where a battle over tax reform is brewing because of a school finance dilemma. A judge has threatened to shut down Texas schools unless the state can wean itself from its over-reliance on local property taxes and generate new sources of state revenue to boost school funding.

But overhauling tax policies to fix school-funding deficiencies is so difficult that few legislatures accomplish significant reforms unless forced by litigation or severe budget crises, both of which are the case in Texas, said James W. Guthrie, director of the Center for Education Policy at Vanderbilt's Peabody College of Education.

"The country is so narrowly divided (that) there's more than one third rail in politics," Guthrie said. "Increasingly, education and taxes are both third rails, and not much is accomplished without some kind of gun being held to the head of elected officials."

Sixteen of the 31 states where officials say education reform is high on the agenda this year currently are embroiled in litigation challenging the way schools are funded. Another 20 states have settled similar lawsuits in the past five years.

About two-thirds of lawsuits challenging state education finance systems go against the state, according to the Campaign for Fiscal Equity, a group that researches school financing lawsuits nationally. However, lawmakers often balk at the tax reforms required to meet court orders to fix broken financing systems.

Lawmakers in states such as Kansas, Montana and Texas this year are on their second or third round of lawsuits ordering changes to provide enough money to help students meet state and federal achievement requirements.

Kansas lawmakers face an April 12 deadline imposed by the state Supreme Court to fix the state's $2.7 billion school finance system. A legislative report estimated last month that the state spends 25 percent less on most students than needed to meet the court order. State lawmakers have yet to propose changes in how education funds are distributed or how to increase those funds.

The Montana Supreme Court ruled in November that the current funding system is unconstitutional and inadequate and ordered the state Legislature to come up with an "educationally relevant" system and a new way to fund it by Oct. 1. The court ruling has drawn the ire of some conservative lawmakers, who oppose raising taxes to fund schools and argue that the high court has no right to tell the Legislature how to do its job.

In retaliation against the Montana court order, Republican state Rep. Verdell Jackson proposed legislation to require the state to fund only "basic" education requirements, excluding extras such as kindergarten, hot lunches, busing and extracurricular activities. However, with Democrats newly in control of both the Legislature and the governor's mansion, some kind of a tax hike is expected to pass.

Texas lawmakers also are working under the gun of a court order to fix the state's $30 billion education financing system, which was ruled unconstitutional last September.

The Legislature and Republican Gov. Rick Perry failed to come up with an education plan during a special legislative session called by the governor last summer. So, last September, District Court Judge John Dietz threatened to shut down all schools if the Legislature does not act to replace the current school financing scheme by October 2005.

Perry has declared school financing an emergency issue, which allows lawmakers to make education the top priority of their 140-day legislative session, which began Jan. 11. The challenge legislators face is reworking the nearly $30 billion annual school budget to reduce reliance on local property taxes by about $5.5 billion and at the same time increase overall education spending by at least $1 billion.

Texas has struggled for years to correct inadequacies in its school financing system, which, like many states, depends heavily on local property taxes to fund education, a practice that is considered unfair to poorer communities.

Any solution to Texas' school financing problem will involve a significant tax hike, which was the sticking point last summer and will prove a significant hurdle in the Republican-controlled Legislature.

"Raising taxes in Texas has always been treated as some sort of sinful process," said Austin, Texas, attorney Buck Wood, who represented school districts against the state and has been involved in education finance litigation for more than 25 years.

Even President George W. Bush, who managed to push through Congress the most ambitious education reform measure in decades, the so-called No Child Left Behind Act, failed as governor of Texas to enact education tax reforms on which he had campaigned. His proposal passed a then-Democratic-controlled House but was defeated by Republicans in the state Senate.

Judge Dietz ruled that Texas's so-called "Robin Hood" school financing system, which attempts to equalize education funding by requiring wealthier districts to underwrite poorer districts, failed to generate enough money to meet state standards and was unconstitutional. The court found that the spending gap between the poorest districts and the wealthiest districts in Texas is more than $1,000 per student. Nationwide, the disparity exceeds $1,300 per student, according to a recent report from the Education Trust, an independent, nonprofit organization that receives part of its funding from the Pew Charitable Trusts, which also funds

"It's not so much that (the current system) doesn't work. The problem is that the state quit putting money into the system," Wood said.

In the past 10 years, the state government's share of education funding has dropped from 68 percent to 38 percent, forcing local school districts to raise property taxes to compensate. Texas ranks 37th nationwide in per-capita education spending, but the state ranks dead last in the percentage of state funds spent on education.

To keep up with inflation, nearly half of Texas' school districts have raised local property taxes to the maximum amount allowed under state law - $1.50 per $100 of property value. Although Texas's Constitution forbids a statewide property tax, Judge Dietz ruled that so many localities were at their maximum taxing power to support education that it was in effect a statewide property tax. The case is on appeal to the Texas Supreme Court, whose nine members all all Republican, but many say the chances are good the ruling will be upheld.

Texas Speaker of the House Tom Craddick (R) has pledged to support boosting education funding by $1.5 billion on top of reducing reliance on the local property tax system. But where that money comes from is an overwhelming question for Texas lawmakers. Texas has no state income tax, and lawmakers cannot impose one without approval from voters in a statewide referendum. And Texas prides itself as being the most business-friendly state in the nation, so new business taxes will face opposition.

"Speaker Craddick, the lieutenant governor and governor all believe that the current system is really on its last legs," said Harrison Keller, director of research for Craddick's office. "There are a lot of difficult questions about how to make these changes, but the leadership is committed to tackling this before the court deadline."


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