Effectively communicating local taxing decisions is never easy. The Truth-in-taxation process is supposed to help local governments provide the information needed to explain these decisions: what they mean for the local school district and what they mean for the taxpayer. Unfortunately, sometimes the terms and calculations provided to us by statute leave as many new questions as answers. Here are some definitions we hope will help you answer the questions often generated by this process. This document is not intended to provide legal advice. You shouldn’t use it to calculate the rates, but rather to help you understand what they mean so you can explain them to your board and community. For calculations, we refer you to the forms on the comptroller’s website.
Effectively communicating local taxing decisions is never easy. The Truth-in-taxation process is supposed to help local governments provide the information needed to explain these decisions: what they mean for the local school district and what they mean for the taxpayer. Unfortunately, sometimes the terms and calculations provided to us by statute leave as many new questions as answers. Here are some definitions we hope will help you answer the questions often generated by this process. This document is not intended to provide legal advice. You shouldn’t use it to calculate the rates, but rather to help you understand what they mean so you can explain them to your board and community. For calculations, we refer you to the forms on the comptroller’s website.
1. What is the no-new-revenue tax rate? The no-new-revenue tax rate is calculated using form 50-589 or 50-884 from the comptroller’s website. The calculations there are designed to calculate the tax rate that would produce the same tax levy in the coming year as was available to the district in the prior year. It begins by taking the prior-year property value, adjusting it for things like ARB processes, taxpayer refunds, and certain newly granted exemptions, and calculating a prior-year tax levy by diving the adjusted value by 100 and multiplying by the tax rate. Then, the current year value, net of certain new properties, is adjusted similarly and a tax rate is calculated that, when applied to the coming year value produces the same levy as was calculated for the prior year. In a world where the district received only local property tax revenue, and collected and kept 100% of its levy, this would be the tax rate that would have produced the same revenue as the prior year (of course, that’s not the world we live in, but more on that in a minute).
Also referenced in statute is a no-new-revenue M&O rate, although this rate is not calculated in the forms on the comptroller’s website. The no new revenue M&O rate is simply the M&O rate in the coming year that would produce the M&O levy from the prior year. It is calculated the same way as the no new revenue tax rate, except the debt portion of the tax levy for the prior year is excluded, allowing the calculation to back into the M&O rate that would produce the same M&O levy as the prior year.
2. Why do we calculate a no-new-revenue tax rate? First, and most importantly, because statute tells us to. Chapter 26 of the Texas Tax Code lays out the calculation of the no-new-revenue tax rate and includes certain steps a district must take if it exceeds the no-new-revenue rate. The intent of the statute is to tell taxpayers the effect of the tax rate on them. Because the tax bill is a function of not just the tax rate, but also the property value to which that rate applies, the no-new-revenue tax rate is intended to give taxpayers an apples-to-apples understanding of the change in tax levy.
If a board adopts a rate that exceeds the sum of the no-new-revenue M&O rate and the current debt rate, the board must adopt the rate by a 60% margin. The current debt rate is the debt portion of the VATR—it is intended to capture the debt rate the district will need to make bond payments in the coming year. There are also requirements for specific language to be included in the boards motion if they are adopting a tax rate that exceeds the no-new-revenue tax rate.
3. How does the no-new-revenue tax rate compare to the rate to maintain revenue? Statute separately requires school districts to calculate a rate to maintain revenue. Oddly, the rate to maintain revenue is not the same as the no-new-revenue tax rate. This can create confusion for school district staff and members of the public alike. The requirement to publish a rate to maintain revenue with the district’s notice of meeting to adopt the budget and tax rate is included in Section 44.004 of the Texas Education Code, and you can find it referenced on form 50-280 on the comptroller’s website. This rate is designed to reflect the fact that school district funding is comprised of state and local revenue minus any required recapture. And since our funding formulas are designed to provide districts similar revenue per student regardless of property value, as property values increase, state aid declines. Additionally, as student counts increase, state aid increases. The rate to maintain revenue, unlike the no-new-revenue rate, takes these interactions between local taxes, state aid, and recapture as well as changing student populations into account.
4. What do these two rates have to do with the voter-approved-tax rate (VATR)? The short answer is not much. The no-new-revenue tax rate and the rate to maintain revenue are required for informational purposes, but they do not impact the VATR for school districts. The VATR is the tax rate you are may adopt without an election, and if you do adopt a rate that exceeds the VATR, you must call a voter approval tax rate election. Districts that hold a voter approval tax ratification election can seek voter approval for up to $0.17 total Tier 2 pennies on top of whatever their Tier 1 MCR turns out to be.
For school districts, the VATR is comprised of an M&O and an I&S component. The M&O component includes two parts: Tier 1 and Tier 2.
The Tier 1 portion of a district’s allowed tax rate is sometimes called the maximum compressed tax rate (MCR) and you can find your MCR by looking at the local property value survey you completed with TEA. TEA calculates this rate by backing into the rate you would need to collect a Tier 1 tax levy that is no more than 2.5% more than the Tier 1 tax levy from the prior year. They give the district the lesser of this rate or the rate that would be derived based on estimated statewide average property value growth. No district’s MCR is allowed to be below 90% of the highest MCR.
To this Tier 1 rate, the district may add Tier 2 pennies. The district may have the greater of last year’s Tier 2 pennies or $0.04 (or $0.05 with unanimous board approval), not including any disaster pennies the district may have from the prior year.
Then, the district may add a debt rate, which is designed to be the rate the district needs to collect sufficient revenue to make bond payments on voter-approved bonded debt in the coming year.
