The Effects of Rate Limits on Property Tax Revenues and School Expenditures: Evidence from Texas

Abstract

ABSTRACT: In 1993, Texas established a maximum 1.5 percent property tax rate that school districts could impose for purposes of funding their maintenance and operations (M&O). Tax limits are intended to contain government growth and increase the efficiency of government services. Almost all states use property tax limits, and their use continues to increase as states consider ways to decrease the growth in property taxes. This study examines whether the 1.5 percent rate limit lowered the growth of M&O tax revenues and school expenditures, whether these effects differed in the short-run versus long-run, and whether school districts increased other tax and nontax revenue sources to help compensate for lower M&O tax revenues. This study also examines whether the rate limit affected student performance. We use a sample of 1,033 Texas school districts during the period 1994 through 2004, and the Heckman maximum likelihood estimation (MLE) approach to help control for selection bias. We find that the 1.5 percent rate limit decreased the growth of M&O tax revenues and school expenditures, and that expenditures were affected less than M&O tax revenues. Our results suggest that districts helped cushion the rate limit’s effect on expenditures by increasing their debt-related tax revenues. We find only limited evidence that the rate limit’s effects differed in the short-run versus long-run. Finally, we find that student test scores are lower for districts at the 1.5 percent rate limit, and that the decrease in test scores is larger for economically disadvantaged students relative to other students. This suggests that the rate limit is associated with decreases in education quality.