The rollback tax rate calculation splits the tax rate into two separate components - a maintenance and operations (M&O) rate and a debt service rate. M&O includes such things as salaries, utilities and day-to-day operations. Debt service covers the interest and principal on bonds and other debt secured by property tax revenues. 1 The rollback tax rate is the sum of M&O and debt service rates. 2 In most cases, the rollback tax rate exceeds the effective tax rate, but occasionally decreases in a taxing unit's debt service will cause the effective tax rate to be higher than the rollback tax rate.

Calculating the Rollback Tax Rate

For school districts, the M&O portion of the rollback tax rate allows school districts to add four cents ($0.04) to the lesser of the current year's compressed operating tax rate or the effective M&O rate to generate operating funds. School districts will get to add any additional cents approved by voters at a 2006 or subsequent rollback election to the compressed operating rate. 3

For other taxing units, the M&O portion of the rollback tax rate is the tax rate that would be needed to raise the same amount of taxes that the taxing unit levied in the prior year plus eight percent. 4

The debt service rate portion is the tax rate necessary to pay the taxing unit's debt payments in the coming year. This part of the calculation does not depend on the last year's debt taxes at all; it considers the amount the taxing unit will need for the current year. The debt service portion of the overall tax rate may rise as high as necessary without triggering the threat of a rollback election. 5

M&O Rate

Other taxing units calculate an effective M&O rate by taking the adjusted prior year's total taxable value used to calculate the effective tax rate and multiplying it by the prior year's M&O rate, and then dividing the product by $100 to get the adjusted prior year's M&O taxes. The prior year's M&O taxes are then divided by the adjusted current year's taxable value to get the current year's effective M&O rate. The rollback M&O rate is the effective M&O rate multiplied by 1.08. 7

Special Provisions

Some taxing units must perform special steps that allow them to adjust their rollback tax rates. Many of these adjustments provide for a higher rollback tax rate.

County Criminal Justice Mandate

Counties may increase their rollback tax rate to replace funds spent to house prisoners sentenced to state correctional facilities. The amount spent by a county includes the cost during the previous 12 months to keep inmates in county-paid facilities after they have been sentenced to a Texas Department of Criminal Justice facility.

The county auditor certifies the amount, based on information provided by the county sheriff, minus any amount received from the state for reimbursement. If the amount is the same or less, the county does not adjust the M&O rate. The county continues to use the same 12-month period in subsequent years. 8

For more information on this mandate, call the Texas Commission on Jail Standards at 512-463-5505.

Tax Increment Financing (TIF)

A taxing unit excludes the taxes paid into a TIF and the captured appraised value that corresponds to the TIF payment in calculating the rollback tax rate. The captured appraised value is the difference in value between the current appraised value and the base appraised value. The base appraised value is the value that existed at the time the TIF was created. The taxes on the base appraised value remain with the taxing unit. Only the portion of the captured appraised value that corresponds to the portion of the tax increment paid into the tax increment fund may be excluded in the rollback tax rate calculation.

If a taxing unit does not have any TIF captured-appraised value in the current year to exclude from the effective and rollback tax rate calculations, then it does not have any tax increment from the last year to exclude in those calculations. 9 This happens when the taxable values in a TIF decline, rather than continue to increase.

When deducting TIF captured appraised value in the calculations, do not include any value that was included in the new property value step of the calculations. This prevents a taxing unit from including the same value in two different deductions in the calculations.

Taxing Units Transferring a Function

If a taxing unit discontinues all of a department, function or activity and transfers it to another taxing unit by written contract, the two taxing units must adjust their M&O rates for the transfer. The taxing unit discontinuing the function subtracts the amount spent for the function in the 12 months preceding the month of the rollback tax rate calculation. If the taxing unit did not operate this function for this 12-month period, the discontinuing taxing unit uses the amount spent in the last full fiscal year in which the taxing unit operated the function. The taxing unit receiving the function adds this amount to the rollback tax rate for the function's expenses. 10

Additional Rollback Protection for Enhanced Indigent Health Care Expenditures

A taxing unit other than a school district can increase its rollback tax rate to generate funds it will spend for enhanced indigent health care expenses. Enhanced expenditures are defined as the amount spent by the taxing unit for M&O costs of providing indigent health care at the increased minimum eligibility standards. The taxing unit deducts any state assistance received for these expenses.

To calculate the effective M&O rate for the current tax year, a taxing unit's enhanced indigent health care expenditures for the prior tax year are computed by subtracting the taxing units increased expenditures from July 1 of the year preceding last year through June 30 of last year and the amount of any state assistance from the enhanced expenditures for the current year (July 1 of the prior year through June 30 of the current year). Any remaining amount is the increased amount for the current year. 11

Debt Service Rate

The debt service portion of the rollback tax rate is the rate necessary to pay the taxing unit's debt payments in the coming year. This part of the calculation concerns what the taxing unit will actually need for the current year. 12

Debt Payments

This step concerns the actual debt payments required for the current fiscal year, not the last fiscal year's debt. Remember that these are debt payments that the current year's property taxes will pay. 13 A taxing unit that pays debt with other funds should not include those payments in the calculation.

School districts are required to consider the amount of facilities state aid (Existing Debt Allotment and/or Instructional Facilities Allotment) they will receive in setting their local debt service rates. 14 Doing so reduces the amount of debt that school districts pay from local funds and produces a lower debt service tax rate. School districts that do not take the state funding into account will both violate state law and levy rates that are too high.

Adjustments to the current year's debt service rate include excess collections from the previous year and the anticipated collection rate for the current year. 15 The taxing unit subtracts the amount of last year's excess debt tax collections from the current year's debt payments and divides the resulting figure by the anticipated current year's collection rate. 16 If the anticipated current year's collection rate is less than 100 percent, this will increase the amount of levy needed to pay debt service. The taxing unit's tax collector certifies the excess debt tax collections and the anticipated collection rate. 17

Anticipated and Excess Debt Collections

A taxing unit that levies a debt service tax must consider anticipated collections in calculating the debt service component of its rollback tax rate. The collector for such a taxing unit must certify the current year's estimated debt collection rate and last year's excess debt tax collections to the governing body or school board. 18

Estimated Debt Collection Rate for Current Tax Year

To find the estimated collection rate, the collector must first estimate the taxing unit's total debt collections from July 1 of the current year through June 30 of the next year. 19 This estimate equals the total tax dollars that will be collected for current debt taxes, delinquent taxes, special appraisal rollback taxes, penalties and interest. 20 The collector will not know the precise amount until this collection period is completed. Truth-in-taxation laws, however, require the collector's estimate. The collector compares this amount to what the taxing unit plans to levy for paying debt service in the current fiscal year.

Dividing the estimated collections by the required debt payments gives the estimated collection rate. 21 For example, the collector projects the taxing unit will take in $950,000 in debt revenues before July 1 of next year. The taxing unit's budget calls for it to levy $1 million in debt service taxes for the current year. The anticipated collection rate is $950,000 divided by $1 million, or 95 percent.

Using an anticipated collection rate of less than 100 percent in the calculations creates a higher debt levy.

If the collector's anticipated collection rate exceeds 100 percent, the collector uses 100 percent in the calculation. Delinquent taxes from prior years may generate more than a 100 percent rate. 22

Excess Debt Tax Collections for Prior Year

The law requires the collector to compare the amount of taxes actually collected in current taxes, delinquent taxes, special appraisal rollback taxes, penalties and interest for last year's debt from July 1 of last year through June 30 of the current year. The collector compares this collected amount with the amount that the collector estimated to collect according to last year's anticipated collection rate. If the taxing unit took in more debt tax dollars than the estimated collection, the collector certifies the amount of excess debt tax collections to the governing body. 23

For example, last year the collector projected a collection rate of 95 percent and the governing body levied $500,000 in debt service taxes. The anticipated debt tax collections last year were $475,000 (.95 x $500,000). The collector determines whether the total amount of debt service taxes collected from July 1 of last year through June 30 of the current year exceeds $475,000 and determines the amount of any excess. If the taxing unit collected $485,000 in debt service taxes last year, the collector certifies excess debt tax collections of $10,000. The taxing unit subtracts this $10,000 from the current year's debt payments to lower the current year's debt service rate.

If the collector projected a collection rate of 100 percent for last year and collected more than 100 percent, the collector may certify excess debt collections of zero. Dividing the adjusted debt payments by the current year's total taxable values, times $100, gives the debt service portion of the rollback tax rate.

Total Rollback Tax Rate

Totaling the effective M&O rate plus 8 percent and the debt service rate gives the total rollback tax rate. 24