Summary of 2006 Legislation

In response to the Texas Supreme Court's threat to invalidate the funding procedures for public schools, the Texas Legislature met in 2006 in a third special session called by the Governor. The special session resulted in increases in certain taxes and a reduction in school property taxes, as well as the allocation of a general fund surplus to school financing until the new taxes take effect. The following summarizes the major changes effecting public school financing that result from the new legislation.

HB 1 - This law requires school districts to reduce maintenance and operations taxes for 2006 and 2007 and sets limits on such taxes in future years. For 2006, the maintenance and operations tax rate is reduced from a maximum $1.50 to $1.33. For school districts charging a different rate than $1.50 in 2005, their 2006 rates are reduced to 88.67 percent of the 2005 rate. However, after applying such tax rate reductions, all school districts are allowed to add 4 cents towards local school enrichment without an election. In 2007, the maintenance and operations tax rate is further reduced to $1.00, or 66.67 percent of 2005 rate for those districts charging a rate different than $1.50 in 2005. Again, the districts may add 4 cents in local school enrichment. With voter approval, local districts may add an additional 13 cents for local enrichment. In later years, a compression rate (replacing the 88.67 and 66.67 percent compressions rates for 2006 and 2007) will be set to determine the maximum amount of maintenance and operations tax. The law does not affect the tax rate that school districts may charge to pay off debt (construction bonds). The school tax rate reduction was funded temporarily with $3.925 billion in surplus funds in the general fund until the property tax relief fund (HB 2) is funded. The law also requires that school tax bills separately show the maintenance and operations rate and debt rate. The 2005 law requiring tax bills to show a comparison of values and taxes between the current year and the fifth previous year was eliminated. The legislation also included a provision that would have protected the elderly and disabled school tax freeze for those qualifying for the freeze in 2006 and 2007 by proportionately reducing the freeze amount to reflect the tax rate reduction. However, this freeze adjustment was contingent on the passage of a constitutional amendment, and the Legislature did not bring forth any constitutional amendment that would have activated the freeze adjustment. Therefore, this portion of the legislation did not take effect. It is anticipated that the school freeze adjustment will be brought forth during the 2007 regular session. Status: Signed by Governor.

HB 2 - This law creates the property tax relief fund, which is funded by increases in tax revenues generated by higher cigarette and tobacco taxes (HB 5), motor vehicle taxes based on standard valuation (HB 4), and the revamped margins tax which replaces the previous franchise tax (HB 3). Until the average school district maintenance and operations tax is not more than $1.00, the fund can only be used for school funding to reduce maintenance and operations tax rates. Thereafter, the fund is allocated two-thirds for further tax rate reduction and one-third for school enrichment. Status: Signed by Governor.

HB 3 - This law replaces the existing franchise tax with a margins tax. It effectively requires most non-individually owned businesses to pay either one-half percent (for retail businesses) or one percent (for most other businesses) of revenues in taxes. A business can deduct either cost of goods, certain employee costs (subject to limitations), or a standard deduction before calculation of the tax obligation. The new tax takes effect in 2008, but the first payment will be due based on revenue generated in a particular business's fiscal year ending in 2007. This law makes the only substantive change in the the Property Tax Code not related to school financing, by amending Section 21.02 to provide that a portable drilling rig only has tax situs in a taxing unit if it is located there on January 1 of the tax year and was located in the appraisal district for the entire preceding year. Otherwise, the rig has tax situs at the owner's principal place of business in this state. This situs provision takes effect in 2007. Status: Signed by Governor.

HB 4 - This law provides that the motor vehicle tax should be collected on at least 80 percent of the "standard presumptive value" on the sale of a motor vehicle. The "standard presumptive value" is determined by reference to a recognized guide book, such as Blue Book value. If the reported sale price is less than 80 percent of this value, then the dealer must provide adequate documentation or a certified appraisal of a different value. Without such supporting documentation, the tax will be charged on the higher of the actual sale price or 80 percent of the "standard presumptive value." The purpose of the law is to prevent false reporting of sales prices intended to reduce the tax obligation, i.e. "liar's affidavits." Status: Signed by Governor.

HB 5 - This law increases cigarette taxes by $50 per 1,000 cigarettes and taxes on other tobacco products (other than cigars) from 35.213 percent to 40 percent of the manufacturer's list price. Status: Signed by Governor.