Impact of No New Revenue Tax Rate for Districts

Magnolia ISD set the tax rate for the 2020-2021 year during the August board meeting at $1.2744 which was 3.5 pennies lower than last year. Although the MISD tax rate has decreased for the past two years, this approved tax rate is higher than the “no new revenue tax rate.” What does this mean?

Earlier this year, the Texas legislature changed the tax term “effective tax rate” to “no new revenue tax rate” with the intent to make it easier to understand the benchmark tax rate needed to generate the same amount of property tax revenue a Government entity collected the previous year. This comparison works well when reviewing a County or City budget where almost all revenue is generated from local property tax. They can simply define the no new revenue rate and then taxpayers can compare that rate to the proposed/adopted rates to verify whether or not the taxing entity set a rate that would generate more revenue than the previous tax year. 

School districts are unique and such comparisons are not as easy. School funding is made up of a combination of local property tax revenue and state funding. The funding system for public schools in Texas is fairly complex. In short, state funding for our schools is related to our local property tax “effort”. If school districts lower their local property rate beyond a certain level, they lose state funding. The state funding system is designed to keep districts’ local property taxes at a certain level. Setting the MISD tax rate to the “no new revenue rate” tax rate would essentially lower the amount of funding per student Magnolia ISD receives from the state, putting the district in a loss of revenue position -- not allowing MISD to cover the needs of the classroom.

If MISD were to adopt property tax rate equal to the “no new revenue rate”, the effects would be:

  • approximately $6.2 million less funding for the 2020-2021 year; and
  • approximately $5.1 million less funding than in 2019-2020.

This sizeable type of a shortfall any year would result in the district having to:

  • use a large portion of the fund balance which weakens the district’s financial position-- example bond ratings, 
  • possible reduction in staffing, and
  • possible cuts to student programs

Because of the way the school funding system works in Texas, school districts need help from the legislature to lower local property tax rates. During the last session, the legislature did just that. They changed the funding formulas to allow districts to reduce local tax rates and still receive equal state funding. For the past two years, Magnolia ISD and other districts in Texas,  has been able to reduce the local school tax rate by 10 pennies due to legislation passed in House Bill 3.

The “no new revenue” rate is a good way to compare revenues raised from one year to the next for cities and districts require a little more analysis. Now you know.