Establish tax collection policies for regular and delinquent collection activities. Effective tax collection policies provide district administrators with a means for keeping collections high and ensuring that tax delinquencies are dealt with quickly and routinely. The Texas Education Agency’s School FIRST financial accountability system, which measures school district financial performance, sets a tax collection rate of 96 percent as the minimum collection standard. That collection rate includes the amounts owed for Maintenance and Operations, Interest and Sinking Fund and delinquent tax collections. While a high percentage of school districts in the state are at or above 96 percent, meeting the standard does not necessarily mean that a district cannot do better.
Why are tax collection rates so important? Well, the more taxes collected, the more money there is available to spend—more money to spend in the classroom. But even more important, school finance formulas look at the amount collected, not at the calculated levy or the tax rate, in determining state funding. Whether the district is property wealthy or property poor, a higher collection rate results in more favorable treatment by the state’s school funding formulas.
School districts establish budgets based on projected revenues—actual dollars that are expected to be collected. If a district is able to generate similar revenues by collecting more of the amount owed, the district should be able to maintain a lower tax rate. For example, if District ABC sets a $1.50 tax rate, also called the nominal tax rate, but only collects two-thirds of it, the effective tax rate is $1.00. The nominal rate is the rate that appears on the tax bills. The effective rate is calculated by dividing a district’s prior year property value into its current year total property tax receipts or collections. If District ABC collected 100 percent of taxes levied, it could, in theory, lower the tax rate to $1.00 and generate the same local revenues. Tax rates are expressed in dollars of tax per $100 of property value. So, a $1.00 tax rate generates a dollar for every $100 of taxable property value in the district.
Districts receive state funding according to how much local revenue they actually collect, rather than how much they levy, or bill, to taxpayers. Funding is in two tiers: Tier I and Tier II. Tier I covers regular and special programs with funding tied to student attendance. For Tier II, or enrichment funding purposes, District ABC in the example shown above would receive state aid based upon the $1.00 effective rate rather than on the $1.50 nominal tax rate. The district is guaranteed a certain amount of funding per penny on the effective rate, so it would lose state funding because it had not made an effective collection effort.
From a fundamental fairness standpoint, honest, hardworking taxpayers expect their neighbors to pay their fair share of taxes. When some taxpayers are allowed to forgo tax payments because of lax tax enforcement, the community’s overall confidence in the system is lowered, with more taxpayers then refusing to pay, lowering confidence even further.
What would a 1 percent increase in the collection rate mean for a school district? In the Brownsville Independent School District, for example, a 1 percent increase in tax collections equates to about $400,000 in additional annual revenues. While there is a point of diminishing return as the collection rate nears 100 percent, the overall result is still an increase in total dollars available today.
Increasing collection rates begins by knowing what a district’s collection rate is today, for both current and delinquent collections. In assessing the collection rates, determine whether the collection rate over the last five years has increased or decreased – then find out why. Sometimes there are good reasons why the collection rate has dropped. For example, one large taxpayer could have run into financial difficulties and filed for bankruptcy, leaving the tax bill unpaid. But other times, the reasons are less clear—sometimes it is just a matter of complacency. Tax collections can also be down if the district has foreclosed on a number of properties but has not quickly returned the properties to the tax rolls. Whatever the reason, knowing why is the first step towards increasing the collection rate.
United Independent School District (ISD), one of the poorest districts in Texas from a property value standpoint, began collecting more delinquent taxes by requesting that the board adopt a policy that requires the district to publish the names of anyone who owes $1,000 or more in accumulated taxes in the newspaper. The ad is published during the month of October each year. The list eliminates any homestead residents over 65 or any accounts that are in bankruptcy. A similar program is in place at Aransas County ISD and school officials report it has been very effective. Both districts have found throwing a little light on delinquent taxpayers help them pay up more quickly. United ISD also files a lawsuit on anyone who owes $500 or more and/or three years of delinquent taxes.
In 1996, in Houston ISD (HISD) one of the primary reasons for a disparity in collection performance was HISD’s reluctance to seize property, particularly homesteads, for back taxes. The district lacked policies and a formal plan for dealing with foreclosures and the sale of delinquent properties. According to district officials and the law firm that collected HISD’s delinquent taxes, the district, as well as the county and city, had an unwritten policy of not seizing homesteads to collect on past due taxes—even though the law allowed local governments the ability to do this and many school districts and local governments were foreclosing on properties for taxes owed throughout the state. And, even when the district obtained lawsuit judgments and the properties were struck off the tax rolls, the properties would sit idle due to the lack of an effective policy to dispose of them, robbing the district of the back taxes and the property tax on the property because the property was not quickly sold and returned to the tax rolls. The unwritten policy actively encouraged delinquency. Property owners would simply refuse to pay the taxes because they knew their properties would not be seized. HISD recognized its collection problem and adopted a policy that made specific provisions for taxpayers with disabilities and those age 65 or older, while it aggressively stepped up its pursuit of delinquent taxes. HISD generated an additional $2.8 million in revenues in the first year and expected those revenues to increase to $12 million in later years.
Working with attorneys and realtors to quickly move foreclosed properties back to the tax rolls can also result in higher collections and can ensure that the property continues to produce tax income in the future. Foreclosed properties come off the tax rolls while they are owned by the school district and should be sold and returned to the tax roll as soon as practically possible. On a side note, district-owned property that is speculative in nature can also result in lost taxes if it is not going to be used—selling that property and returning it to the tax roll can benefit the district.
Because school districts typically buy goods and services from a wide variety of vendors, it is also a good idea to periodically check the vendor list against the delinquent tax rolls. By setting up a policy of withholding payments until tax liabilities are paid, or setting up a payment schedule with those vendors, the district may be able to directly influence collections, helping with tight budgets.
