## Facts

- Numerous Texas public school districts challenged the state’s public school finance system, alleging it effectively compelled local property taxation at or near the statutory maximum to fund state-mandated education.
- The challenged scheme relied heavily on local maintenance-and-operations (M&O) property taxes, subject to a $1.50 per $100 valuation cap.
- The districts asserted that, because most districts had to tax at or near the cap to meet state requirements, local property taxes had functionally become a state property tax barred by the Texas Constitution.
- The districts also claimed the system failed to provide an “efficient” system of public free schools adequate to secure a “general diffusion of knowledge.”
- After a remand from earlier jurisdictional litigation, the trial court ruled largely for the districts, finding both (1) an unconstitutional de facto state property tax and (2) constitutional inadequacy under the “general diffusion of knowledge” requirement.
- The State appealed directly to the Supreme Court of Texas.

## Issues

1. Whether the school finance system, as operated under the $1.50 M&O cap and related statutory controls, imposed a prohibited state ad valorem property tax under Texas Constitution article VIII, section 1-e.
2. Whether the system violated Texas Constitution article VII, section 1 by failing to provide an “efficient” system of public free schools sufficient for the “general diffusion of knowledge.”
3. Whether the degree of state control left districts without meaningful discretion in setting local tax rates, bearing on the state-tax prohibition and related structural claims.

## Decision

- The Supreme Court of Texas held that the system had become a de facto state property tax in violation of article VIII, section 1-e because districts lacked meaningful discretion over M&O tax rates.
- The Court rejected the trial court’s finding of inadequacy, concluding the system had not fallen below the constitutional minimum required for a general diffusion of knowledge under article VII, section 1.
- The Court granted declaratory relief as to the constitutional violation and stayed the effect of its judgment to allow the Legislature time to respond.
- The Court remanded for further proceedings consistent with its opinion, including matters related to attorneys’ fees.

## Legal Principles

- A nominally local property tax becomes an unconstitutional state property tax when state control over the tax is so complete that local officials have no meaningful discretion in setting the rate.
- When a statutory tax-rate cap, combined with state funding demands, effectively forces districts to tax at or near the maximum to provide the required educational program, the State has substantively set the tax rate.
- The “general diffusion of knowledge” requirement sets a judicially enforceable constitutional floor, but courts apply a deferential standard and do not set optimal funding levels.
- A system is constitutionally adequate if, as a general matter, it is structured, operated, and funded so public schools can provide the basic level of education required for a general diffusion of knowledge.
- In structural constitutional litigation, the court may delay the effect of its judgment to avoid disrupting government operations and to permit legislative correction.

## Conclusion

The Texas Supreme Court ruled that the public school finance system, though formally based on local taxation, functioned as a prohibited state property tax because districts had no meaningful rate-setting discretion, but the system had not yet become so deficient as to violate the constitutional requirement to provide an efficient system securing a general diffusion of knowledge; the Court stayed relief to give the Legislature time to act and remanded for further proceedings.


Neeley v. W. Orange-Cove Consol. Indep. Sch. Dist., 176 S.W.3d 746 (Tex. 2005)