Texas district challenges state school finance system: ‘They're using us as tax collectors’

Texas' byzantine school finance system will face legal scrutiny for the first time in a decade after a rural school board voted to sue the state.

The Midland Independent School District board unanimously greenlit the lawsuit Tuesday night, arguing that the state's restrictive funding rules unfairly strip the local board of its power to levy property taxes. 

READ MORE: Search our map to see how much your Texas school district will get after lawmakers' $8.5 billion boost

The suit, which will be filed in Travis County, sets up the first significant challenge to the system since 2016 and, if successful, could force the state Legislature to rework the system to allow districts to keep more of their local taxes. It comes as lawmakers have struggled in recent years to address voter anger over rising property taxes, with Gov. Greg Abbott going as far as calling for abolishing school taxes entirely for homeowners.

Josh Guinn, the Midland ISD board president who proposed the suit, said he did not know yet whether other districts would join. But the board must act to protect its power, he said.

"I think Midland has paid its fair share in property taxes to the state, and it's time to challenge it," Guinn said in an interview ahead of Tuesday's meeting.

Asked by a fellow board member if the suit was connected to Abbott's property tax push, Guinn said no.

"I've never met the man," he said.

The state's "Robinhood" system, created to collect and redistribute excess taxes from property-rich districts, has faced legal challenges from school districts about once a decade since the 1980s. The most recent lawsuit, which was joined by over two-thirds of Texas' 1,200 school districts, was rejected by the state Supreme Court in 2016. Several previous challenges were more successful, forcing overhauls of tweaks to the state formula.

The number of districts sending local school taxes to the state, a system known as "recapture," was initially small. But more than 200 school districts are now paying recapture representing more than $2.5 billion in the 2025-2026, per recent Texas Education Agency estimates. 

The size of the payments have also swelled in recent years, especially in high-growth areas with rising property values. Though lawmakers pumped a record $8 billion into schools last year, that money went to pay for specific things, such as more teacher raises, rather than raising the basic caps that would have allowed districts to keep more local taxes. 

Payments from Houston ISD peaked in 2023 at $300 million, according to the Texas School Coalition. Austin ISD led the state that year, sending nearly $1 billion - more than half of its total tax levy. Other high-income districts, including Plano, Eanes and Highland Park, have also led annual recapture payments. So have tiny rural districts like Midland that contain significant oil wealth.

The new lawsuit specifically targets a 2019 bill passed by the Legislature that shifted power to set property tax rates - and dictate how that money is spent - from school boards to the state's education commissioner.

For Midland, the commissioner's rate means it must levy $313 million in property taxes to pay for the district's daily operations, with $83 million of that sent to the state. The district says it has paid nearly $1 billion to the state over the last decade.

Money collected through recapture is generally redistributed the school districts, but can also be used to generally balance the state budget, including funding for charter schools.

The result leaves local school boards "with control over only a small fraction of their own local property taxes," the school district's proposed complaint, written by the board's attorneys.

The suit argues the state's funding scheme is so restrictive that it amounts to a state property tax, which is prohibited under the Texas Constitution. Past challenges have made similar arguments with mixed results before the Texas Supreme Court.

Guinn said a lot has changed since the court last rejected a challenge to the school funding method in 2016.

"Even with the monies we keep, we have less discretion on how it's spent now, with mandates and other things," he said.

"They're using us as tax collectors," Guinn added. "Tonight I'm bringing it to the board to say, ‘Enough's enough.'"

Education Commissioner Mike Morath's office did not respond to a request for comment.

Both lawyers on the case have deep ties to the school finance system. Kevin O'Hanlon served as general counsel to the Texas Education Agency decades ago and was part of several previous school finance lawsuits. Kara Belew previously worked for Gov. Greg Abbott and his predecessor, Rick Perry, and she served as a finance commissioner for TEA until 2018.

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