Texas school finance

The forest (a high-level overview)

Understanding how Texas pays for public schools

Texas educates more than 5.5 million students in over 1,200 school districts. Every day, public schools provide students with instruction, transportation, meals, counseling, special education services, career and technical education, athletics, fine arts and countless other programs that prepare young Texans for success.

Paying for all of this requires a complex funding system that combines local property taxes, state funding and a small amount of federal funding.

The Texas Legislature controls nearly every major aspect of school funding. Lawmakers determine how much money districts receive. Local school boards decide how to spend those dollars, but have little control over how much they receive.

While the formulas themselves can be highly technical, the basic mechanics are easier to understand than many people realize.

The Legislature sets the rules

Everything begins at the Capitol. Every two years, the Legislature decides how much money schools are entitled to receive by setting funding formulas in state law.

Think of this like a bucket. The bucket represents how much funding the state says it takes to fund a school.

Local property taxes fill the bucket

Once the state determines how much funding a district should receive, local property taxes are used first.

If local taxpayers generate enough revenue to fill the bucket, the district receives little extra from the state.

If local property taxes don’t generate enough to fill the bucket, the state makes up the rest.

Recapture, a.k.a. Robin Hood

Some districts generate so much property tax revenue that the bucket overflows.

When this happens, excess revenue is returned to the state through recapture, often referred to as the “Robin Hood” system.

Inadequate funding

Since COVID, the cost of educating students has risen dramatically. Inflation has driven up the price of transportation, utilities, insurance and much more.

State funding has not kept up with these rising costs. Despite record economic growth and a multi-billion dollar budget surplus, the Legislature has only made modest increases to school funding.

Texas has also created a series of new requirements for schools to pay for without giving them the funding to pay for them.

In an effort to keep up, districts across Texas have been forced to adopt deficit budgets, cut programs and even close schools.

The greatest challenges facing public education today are the result of Texas’ choice to inadequately fund public schools.

The trees (a mid-level overview)

Texas school finance is frequently described as one of the most complicated funding systems in the country. While the formulas themselves can be highly technical, the basic mechanics are easier to understand than many people realize.

How the state decides funding

The legislature decides how much money schools are entitled to receive by setting funding formulas into state law.

The Basic Allotment is the building block for school funding. Every school district receives $6,215 per student.

The state also provides additional dollars for a variety of other school functions. Examples include:

• Students who receive Bilingual Education
• Students who participate in Career and Technical Education
• Students who require special education services
• Districts that provide early education
• Students who are identified as ‘Gifted and Talented’
• Funding for school safety
• Funding for transportation

The state also provides additional dollars for school districts that are considered rural or have a small number of students.

The Legislature reviews these funding formulas during each legislative session. However, because the formulas are not automatically tied to inflation, their purchasing power declines whenever lawmakers choose not to increase them.

Rising property values ≠ larger school budgets

Every school district collects local property taxes from homeowners and businesses within its boundaries.

Rising home values do not automatically translate into larger school budgets. When local tax collections increase because property values rise, the state simply reduces the amount of state aid the district would otherwise receive.

For districts with exceptionally high property values, those additional local dollars are sent back to the state through recapture.

Recapture concerns

Even property-poor districts that receive large amounts of state aid from recapture are struggling financially because the state’s funding formulas have not kept up with rising costs.

Simply redistributing inadequate funding does not solve the underlying problem of insufficient statewide investment.

It’s also important to note that recapture was created as a means of supporting poor school districts that require large amounts of state aid. Now, a significant portion of recapture dollars goes to fund the rapid growth of charter schools and back into the state’s general revenue fund for projects such as border enforcement.

How schools spend their money

Many people assume significant waste exists in public education budgets. In reality, the vast majority of school spending directly supports students.

Personnel costs account for the overwhelming majority of school spending. Teachers, bus drivers, custodians, cafeteria workers, nurses, counselors, librarians, instructional aides and principals all play critical roles in serving students each day.

Because so much of a district’s budget supports people rather than equipment or buildings, budget cuts often result in staff reductions or larger class sizes rather than eliminating unnecessary spending.

In the weeds — understanding the mechanics of Texas school finance

Tier 1 funding

Tier 1 funding is simply the base amount school districts receive through a variety of formulas. Tier 1 includes the Basic Allotment and a variety of other additional funding formulas. Examples include…

• Basic Cost Allotment
• Compensatory Education Allotment
• Special Education Allotment
• Career & Technology Allotment
• Small & Midsize Allotment
• Early Education Allotment
• Bilingual Allotment
• Transportation Allotment

Tier 2 funding

Tier 2 funding provides school district ‘enrichment’ funding, intended to supplement the basic funding provided by Tier 1.

To receive Tier 2 funding, school districts must levy additional taxes beyond the state-set maximum tax rate. This higher tax rate is described as “golden” and “copper” pennies and is described in greater detail below.

M&O taxes vs I&S taxes

School districts levy two primary property taxes:

• Maintenance & Operations (M&O) taxes, which fund the day-to-day operation of schools, including teacher salaries, transportation, utilities, classroom supplies, counseling services and campus operations.
• Interest & Sinking (I&S) taxes, which voters approve to finance school construction, renovations and bond debt. These dollars cannot be used to pay teachers or operate schools.

Maximum Compressed Tax Rate

The Maximum Compressed Tax Rate (MCR) is the state-calculated limit on school district property tax rates. It acts as a ceiling on school districts’ maintenance and operations (M&O) tax rate and provides property tax relief.

The Legislature has consistently lowered the MCR every legislative session. For tax year 2026, the maximum compressed tax rate is 0.6254 cents for every $100 dollars of taxable property value.

A school district can only adopt a tax rate above the MCR following the process described below.

M&O: ‘Pennies’ and Voter Approved Tax-Rate Elections

School districts are allowed to increase the maintenance and operations tax rate above the state’s compressed rate using 17 ‘golden’ and ‘copper’ pennies. Each ‘penny’ represents an additional .01 cents of M&O tax rate per $100 of taxable property value.

• Golden pennies: The first eight additional pennies of tax effort an ISD may adopt above the state’s compressed rate. They’re ‘golden’ because they are not subject to recapture — “Robin Hood” — allowing ISDs to keep the full revenue generated.
• Copper pennies: The next nine additional pennies of tax effort an ISD may adopt above the state’s compressed rate. They’re ‘copper’ because they are subject to recapture, meaning the state takes away a significant portion of the revenue generated.
• Voter-approved tax-rate elections (VATREs): An ISD can levy the first five golden pennies without asking for permission from voters. The additional 12 cents can only be accessed by community approval via a voter-approved tax-rate election.

I&S: Bond Elections

When an ISD wants to make upgrades to buildings or build a new school, they can ask voters for permission to issue a bond that is paid back over time via I&S taxes.

Texas school finance challenges

Inflation challenge

Perhaps the biggest structural weakness in Texas school finance is that the Basic Allotment is not automatically adjusted for inflation.

Every year, districts pay more for: utilities, insurance, transportation, technology, building maintenance, etc…

Unless the state increases the Basic Allotment, districts must absorb those higher costs within essentially the same funding level.

This means schools lose purchasing power every year the funding formulas remain unchanged.

The price of a full cart of groceries is a lot higher now than it was five years ago. School districts face the exact same challenge.

Charter school funding challenge

Charter schools are state-funded schools that operate under less strict rules than traditional independent school districts. They do not have elected school boards, and are managed by an appointed board of directors.

Traditional schools are funded by a combination of local property taxes and state aid. Charter schools, by contrast, do not have any local property tax base. They rely entirely on state aid.

Charter schools have no boundaries like ISDs and are free to grow rapidly throughout the state. As charter schools expand, the state’s financial obligation grows as well.

Charter expansion increases demand on education funding, driving up the need for recapture.

This is not to mention charter schools’ deliberate strategy of extensive marketing and building schools near existing public schools to attract students. Every student who leaves a traditional public school for a charter takes thousands of dollars from the local public school system.

In the 89th legislative session, while traditional public schools received only a small increase in funding, charter schools received millions in new funding for their facilities.

Attendance- vs enrollment-based funding

Texas is one of only a handful of states that funds public schools based primarily on attendance rather than enrollment. While the distinction may sound technical, it has significant consequences for school districts and the students they serve.

Enrollment represents the number of students a district is responsible for educating. Attendance measures how many of those students are physically present in school each day.

Imagine a district with 10,000 enrolled students. If average attendance is 95 percent throughout the school year, the state effectively funds the district as though it serves only 9,500 students — even though the district remains responsible for educating all 10,000.

The problem is simple: schools incur most of their costs regardless of attendance rates.

A student who is absent because they are sick still has a teacher assigned to their classroom. Their desk still exists. Their school must still be heated and cooled. The district must still operate bus routes, employ counselors, maintain libraries, provide technology and be prepared to educate that student the moment they return.

<>Schools cannot hire 95 percent of a teacher because attendance averages 95 percent. They cannot close five percent of their classrooms during flu season or reduce utility bills because a few hundred students stayed home on a rainy day. The overwhelming majority of school costs remain fixed regardless of daily attendance.

Our schools would receive millions in additional funding if Texas joined the majority of the country in funding schools based on enrollment, not attendance.

The property tax relief challenge

Over the past two decades, in an effort to deliver property tax relief, the Legislature has dramatically compressed local school district tax rates.

As a result, local school boards have very little flexibility when costs increase. If costs rise, the additional pennies ISDs have to adjust their tax rates are not enough to cover those additional expenses. Instead, they must wait for the Legislature to increase school funding — or make difficult cuts to balance their budgets.

In theory, the state “holds schools harmless” by replacing the local revenue lost through tax compression with additional state funding. Unfortunately, in recent years, the mechanics of ‘hold harmless’ provisions often leave school districts shortchanged.

The issue is not whether homeowners deserve property tax relief. The issue is that property tax relief should be paid for by the state’s growing revenues, not by limiting the long-term financial stability of Texas public schools.

The bottom line

Texas does not lack the economic capacity to invest in public education. It is one of the fastest-growing economies in the nation and regularly reports strong state revenues.

The central question is not whether Texas can afford to invest more in its public schools, it is whether state leaders choose to make public education a funding priority.

Until the Legislature modernizes the school finance system, regularly adjusts funding to account for inflation and provides sustainable investments that reflect the true cost of educating students, school districts will continue to face difficult decisions that affect classrooms, teachers and ultimately the success of Texas students.

Additional reading

Every Texan’s PDF report examining the current state of public education funding in Texas and the growing challenges facing students, educators, and communities statewide. Read an online summary.

Raise Your Hand Texas’ video How public cchools in Texas are funded, opens in YouTube.

This school finance explainer fulfills NBI #8, approved by the 2026 TSTA House of Delegates.