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City Council considers tax swap with school district

Monday, May 22, 2017 by Jack Craver

City Council is exploring a number of ways the city of Austin can lend a hand to the Austin Independent School District, which will forfeit $406 million this year to the state under Texas’ “recapture” policy.

At a work session on Wednesday, Council members discussed whether the city should take over certain programs that are currently run by the school district as a way to deliver taxpayers a better bang for their buck.

AISD is one of a number of districts that – due to high property values – surrender a significant portion of property tax revenue to the state. The state then redistributes that money to districts with low property values.

Texas’ “Robin Hood” policy, which was implemented in 1993, is styled as a way to help poorer areas that struggle to raise money from property taxes alone, but critics contend that it hurts urban districts that are property rich in the aggregate but also have greater needs due to high levels of poverty.

The district’s standard “compressed” tax rate is $1 per $100 of taxable property value. A large percentage of the revenue generated by that rate is recaptured by the state.

However, the state allows districts to raise the rate by up to an additional 17 cents. The school board is allowed to raise it by up to 4 cents without voter approval. Any further increase must be put to the ballot.

Voters have approved two referendums in recent years to raise the AISD tax rate, which now stands at $1.079. But there’s a major catch: While the first 6 cents above the compressed rate is not subject to state recapture, any increase beyond that is subject to an even greater recapture.

As a result, of the $18.8 million in revenue that the most recent $0.019 rate increase generated, AISD only retained $7.5 million. The other $11.3 million went into state coffers.

Hence the concept of a “tax swap,” in which another taxing entity – the city – pays for certain school district services. The school district could then lower its tax rate.

State law would allow the city to raise its taxes beyond the typical “rollback rate” to accommodate the new spending without the risk of a “rollback election,” which is triggered if 5 percent of residents sign a petition demanding to lower taxes down to the rollback rate.

At first glance, such a tax swap appears to be a no-brainer, at least for most Austin residents. Rather than paying $18.8 million in taxes to the school district, most of which doesn’t even stay in the community, they could pay $7.5 million in taxes to the city, all of which would fund local services.

But there are a number of complications to such a deal.

For one, it is challenging if not impossible for the city to run programs at the same cost as the school district, explained Deputy Chief Financial Officer Ed Van Eenoo. The city spends far more on its employee pensions than the school district, whose employees are part of a statewide teachers retirement system. The city’s health care costs are also significantly higher.

The tax swap only allows the city to increase its tax rate beyond the rollback rate to accommodate the spending that the district is forfeiting. Thus, if it costs the city $1.5 million to run a program that the district was operating for $1 million, the city would be at risk of triggering a rollback election.

The tax swap would only work if the service being funded by the city could reasonably be framed as being of a “municipal purpose” and if the district was no longer providing the program. Regular school expenses wouldn’t qualify. A specific after-school program, however, probably would.

Another option would be for the city to forgo the idea of a tax swap but simply increase its existing funding for school district programs, which totaled $2.5 million last year, explained Van Eenoo. That solution, he said, would likely be easiest to implement.

However, given that city revenue is already projected to fall short of covering all of the city programs Council is aiming to fund, increasing assistance to AISD will almost certainly mean the city would go over the rollback rate, said Van Eenoo.

Van Eenoo and a number of Council members acknowledged that whether or not it is accompanied by a school district property tax decrease, any city tax increase is politically fraught.

A quarter of city residents live in other school districts – such as Round Rock, Del Valle, Pflugerville and Manor – and would therefore not directly benefit from the increased AISD services or the reduction in AISD taxes. Seniors, whose AISD taxes are already frozen at a lower rate, would also likely see a net tax hike if the city tax rate increases.

Council Member Jimmy Flannigan said that there would likely be enough signatures for a rollback election just from his Northwest Austin district, most of which is not located in AISD. Although he emphasized that he supported spending in a way that will benefit the city as a whole – even if it doesn’t go to each district equally – Flannigan said he hoped there were alternative ways the district could come up with the money.

Council Member Ora Houston worried about the impact on seniors, and whether they would be able to perceive the benefit.

“This is one I’m really going to think about because I’m not sure how I’m going to explain any of this,” she said.

Mayor Steve Adler, however, focused on the potential upside.

“It could be presented as we lowered your taxes and got more services,” he said.

Photo by John Flynn.

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