Key Aspects of School Funding in Texas

A collaboration between Lewis McLain & AI

A Guide to How Schools Are Paid For, Why It Never Feels Like Enough, and the Big Debate Now at Texas’ Doorstep

Public education in Texas is both enormous and intimate. It is a system of more than 1,200 school districts serving nearly 5.5 million children. It is funded by formulas that even experienced administrators struggle to explain, yet it is felt every time a homeowner opens a property tax bill or a teacher receives a paycheck. It is rich in promise, strained by costs, and increasingly defined by political crosscurrents. Texas prides itself on flexibility, local control, and low taxes — but those values continually collide with the financial realities of running schools in a fast-growing, geographically massive state.

This essay maps the entire landscape of school funding in Texas: where the money comes from, how it is distributed, what the Legislature has changed in recent years, how vouchers and property-tax relief affect the system, and why Governor Greg Abbott has embraced the bold and controversial idea of eventually eliminating school property taxes altogether. Whether this vision becomes reality — and what shape the public-school system will take in the next decade — depends on understanding the architecture beneath it.

One truth stands out: Texas cannot fix teacher pay, student achievement, enrollment pressure, recapture, or facilities needs until it confronts the underlying structure of its finance system.

I. Constitutional Foundation: What Texas Promised

All school-funding debates begin with the Texas Constitution, Article VII, which requires the Legislature to establish and maintain an “efficient system of public free schools.” The courts have consistently interpreted “efficient” to mean:

  • equitable across districts
  • fundamentally adequate
  • not dependent on extreme disparities in local wealth

In the late 1980s and early 1990s, the Edgewood v. Kirby decisions transformed Texas school finance. The Texas Supreme Court ruled that wide disparities between wealthy and poor districts violated the Constitution. To remedy this, the Legislature created recapture, often called “Robin Hood,” a system requiring wealthy districts to send excess local revenue back to the state.

This constitutional framework — equity, adequacy, and local autonomy — continues to shape every reform today.

II. The Three Revenue Streams: Local, State, Federal

Texas school districts rely on three primary revenue sources, but they play very different roles.

1. Local Property Taxes

These are the backbone of school funding. Districts levy:

  • Maintenance & Operations (M&O) tax rates for salaries and day-to-day operations
  • Interest & Sinking (I&S) tax rates for debt on buildings

Local revenue varies dramatically depending on the strength of the tax base.

2. State Funding

State dollars are distributed through the Foundation School Program (FSP). The system uses:

  • a Basic Allotment (BA)
  • adjustments for special-population students via Weighted Average Daily Attendance (WADA)
  • transportation allotments, small district adjustments, and more

If a district cannot raise enough locally to meet its entitlement, the state fills the gap.

3. Federal Funds

These make up roughly 10 percent of district revenue, supporting:

  • Title I
  • IDEA special education
  • school nutrition programs
  • and other targeted mandates

These funds help but are not the backbone of Texas school finance.

III. How Texas Calculates Funding: Tier I and Tier II

Texas uses a tiered structure.

Tier I — The Foundation Program

This ensures a minimum educational program for every student through:

  • Basic Allotment × WADA
  • special-population weights
  • transportation
  • small/midsize adjustments

Tier II — Local Enrichment

Districts can raise additional M&O pennies called golden pennies and copper pennies.

  • Golden pennies: high yield, not subject to recapture
  • Copper pennies: lower yield, recaptured above wealth thresholds

Most enrichment beyond the compressed rate requires voter approval through a VATRE.

IV. Recapture: The Equalizer Few Love but Courts Demand

Recapture exists because property values vary wildly across Texas. Districts with high property wealth per WADA (often due to mineral values or commercial tax bases) generate far more revenue per penny than property-poor districts.

The formula is simple:

When local wealth per WADA exceeds the Equalized Wealth Level, the surplus must be recaptured.

It is politically controversial but constitutionally necessary.

Districts like Austin ISD — wealthy tax bases but high needs — often pay recapture amounts far larger than their own programmatic flexibility would prefer. Meanwhile, rural or urban property-poor districts rely heavily on these equalized dollars.

V. Texas in the National Landscape

Texas educates one of the largest student bodies in the nation yet consistently ranks in the lower third for per-pupil spending. Factors include:

  • rapid population growth
  • inflation decreasing the value of the Basic Allotment
  • aging facilities in older districts
  • special-education obligations that exceed state reimbursement

The teacher-retention crisis reflects these funding pressures directly.

VI. Vouchers and Education Savings Accounts (ESAs)

The introduction of ESAs in 2025 marked a structural shift. These accounts divert state dollars to private education options. Crucially:

  • ESA dollars are removed before school-finance formulas operate
  • which reduces the total funding pool for public education
  • and increases the state’s long-term cost obligations

Supporters emphasize choice; critics highlight the impact on district resources.

VII. Tax Compression and Homestead Exemptions

Texas has repeatedly compressed school M&O tax rates — most dramatically in 2006 and again in 2019 under HB 3. Recent constitutional amendments increased homestead exemptions and compressed rates further.

This means:

  • homeowners feel relief
  • but the state must backfill more revenue
  • and state obligations grow exponentially over time

If the economy slows, the state may struggle to maintain these commitments.

VIII. Governor Abbott’s Proposal: Eliminate School Property Taxes

Governor Abbott has stated he wants Texas to eliminate school property taxes completely. This would shift the largest funding mechanism for public schools to:

  • sales taxes
  • consumption-based alternatives
  • growth revenue
  • or new statewide tax instruments

This raises critical questions:

  • How do we preserve local control?
  • How do we ensure equity across 1,200+ districts?
  • What happens in recessions?
  • How do ESAs interact with a fully state-funded system?

It is the most ambitious tax proposal in modern Texas history.

IX. Where Funding Pressures Are Felt Most

Teacher Pay

Texas trails the national average, especially in large urban districts.

Special Education

State funding does not cover true required costs; districts subsidize heavily.

Facilities

Older urban districts face major reinvestment needs, while fast-growth suburban districts must build rapidly.

Operational Costs

Inflation affects utilities, transportation, insurance, and program expenses.

Across Texas, educational needs are rising faster than revenue.

X. Adequacy and Equity in a Changing State

Texas is now more:

  • urban
  • suburban
  • economically diverse
  • demographically complex

than at any point in its history.

Equity concerns involve not just property wealth but:

  • disability status
  • rural decline
  • special-population needs
  • enrollment patterns

Ensuring adequacy will require updating the Basic Allotment and adjusting cost structures to reflect modern realities.

XI. What a Stable System Would Require

A modern, stable school finance system would include:

  • indexing the Basic Allotment to true local inflation (can be much higher than the national headline inflation!)
  • meaningful local discretion without destabilizing equity
  • predictable state funding even in downturns
  • sustainable integration of ESA costs
  • adequate support for special-population students
  • transparent outcomes and accountability

Without long-term structural reforms, Texas will continue to struggle with volatility.

XII. The Elephant in the Room

Every major issue — teacher pay, property taxes, recapture, ESAs, special education, enrollment shifts — all trace back to one fundamental question:

How does Texas choose to fund its schools?

Until the state updates this architecture for a 21st-century population, every subsequent debate will remain a patch on an aging foundation.

APPENDIX A — Key Definitions and Formula Explanations

Basic Allotment (BA): foundational per-student funding.
Weighted Average Daily Attendance (WADA): adjusts attendance for special-population weights.
M&O Tax Rate: used for daily operations.
I&S Tax Rate: used for bond repayment and facilities.
Tier I: baseline program funded by state and local revenue.
Tier II: enrichment funding through local discretion (golden and copper pennies).
Golden Pennies: high-yield pennies, free from recapture.
Copper Pennies: enrichment pennies subject to recapture.
Foundation School Program (FSP): state’s primary funding system.
Equalized Wealth Level (EWL): recapture threshold.
Recapture: excess local property wealth reclaimed by the state.
ESA: Education Savings Account for private schooling.
Tax Compression: state-mandated lowering of local M&O rates.

APPENDIX B — Major Historical Milestones in Texas School Finance

Late 1800s–1950s: Foundation of statewide public education; wide funding disparities.
1989–1995 (Edgewood era): Courts declare system unconstitutional; recapture created.
2006: HB 1 compresses tax rates after West Orange-Cove.
2019 (HB 3): Major reform expanding Tier II, adjusting weights, compressing M&O rates.
2023–2025: Homestead-tax changes; continued compression; ESAs approved; funding obligations expand.

APPENDIX C — Data Landscape & Current Funding Realities

Texas spends below the national average per pupil. Recapture exceeds $3 billion yearly.
Districts across Texas experience:

  • fast-growth facility pressures
  • rural staffing shortages
  • urban aging infrastructure
  • special education obligations beyond state reimbursement
  • recapture obligations that limit program flexibility

Teacher turnover is high, especially in high-need districts.

Despite GDP strength, education funding levels struggle to keep pace with demographic realities.

APPENDIX D — Policy Options, Trade-Offs, and Pathways Forward

1. Index the Basic Allotment to inflation

Maintains purchasing power and stabilizes district operations.

2. Reform recapture but preserve equity

Consider raising EWL thresholds or adjusting guaranteed yields
while still ensuring a constitutionally “efficient” system.

3. Provide recession-proof state support

Create rainy-day triggers that stabilize district budgets during economic downturns.

4. Integrate ESAs into long-term fiscal planning

Ensure private-education subsidies do not undermine district stability or local control.

5. Support special-population students adequately

Reevaluate weights for bilingual, special education, and compensatory education.

6. Rebalance state–local responsibility

Clarify long-term commitments given rapid local tax-base shifts.

7. Increase transparency and public accountability

Build trust in allocation decisions and avoid opaque formula adjustments.

APPENDIX E — Top 100 Districts Paying Recapture Amounts.

Leave a comment