TO:	Honorable Morgan Meyer, Chair, House Committee on Ways & Means
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB4809 by Capriglione (Relating to the strong families credit against certain taxes for entities that contribute to certain organizations.), As Introduced

General Revenue-Related Funds, Five- Year Impact:

All Funds, Five-Year Impact:

Fiscal Analysis

The bill would add new Chapter 207 to Title 5 of the Alcoholic Beverage Code (Taxation). The bill would allow a taxpayer who contributes to an eligible organization a strong families credit against certain alcohol beverage taxes. The amount of a taxpayer's credit is the lesser of the amount of designated contribution made to an eligible organization during the state fiscal year or the amount of taxes paid by the taxpayer during the state fiscal year.

The bill would add new Chapter 230 to Title 3 of the Insurance Code (Department Funds, Fees, and Taxes). The bill would allow a taxpayer who contributes to an eligible organization a strong families credit against any tax liability incurred by an entity under Chapters 221 through 226 or Chapter 281 of the Insurance Code. The amount of an entity's credit is the lesser of the amount of designated contribution made to an eligible organization during the year covered by the report or the amount of the entity's state insurance tax liability for the year covered by the report after applying all other applicable credits.

The bill would add new Subchapter N to Chapter 171 of the Tax Code (Franchise Tax). The bill would allow a taxable entity who contributes to an eligible organization a strong families credit against its franchise tax. The amount of a taxable entity's credit is the lesser of the amount of designated contribution made to an eligible organization during the period covered by the report or the amount of franchise tax due for the report after applying all other applicable credits.

Subchapter N would provide definitions of “designated contribution,” “eligible organization,” and “strong families credit.” Subchapter N would provide qualifications for eligible organization, verifications required for eligibility, and duties required by the eligible organizations.

The maximum amount of credit that would be awarded for the 2024 state fiscal year is $25 million and the Comptroller would allocate that amount amongst taxpayers eligible for the credit. The bill would provide for the same maximum amount in subsequent fiscal years if less than the maximum amount was awarded in previous fiscal year. If the maximum amount was awarded the previous fiscal year, the bill provides for an increase in the amount of 110 percent for the next state fiscal year. The maximum amount of designated contributions a taxpayer may make to all eligible organizations is $2.5 million in the 2024 state fiscal year. The bill provides for an increase in the maximum contribution of 110 percent of the amount allowed for the previous state fiscal year.

The bill would add new Chapter 203 to Subtitle I, Title 2 of the Tax Code (Severance Tax). The bill would allow a producer who contributes to an eligible organization a strong families credit against its gas production or oil production tax. The amount of a producer's credit is the lesser of the amount of designated contribution made to an eligible organization during the state fiscal year or the amount of taxes paid by the producer under Chapter 201 or 202 during the state fiscal year.

The bill states that contributions must be made on or after January 1, 2024, in order to be used for the strong families credit and that the credit only applies to a report originally due on or after January 1, 2024.

The bill would take effect January 1, 2024.

Methodology

The bill allows for the tax credit starting with the 2024 state fiscal year. The estimate assumes that all available credit will be used. While some of the costs may be allocable to other funds depending on which taxes credits are claimed against, the cost of the credits is provisionally indicated as costs to general revenue as the share of claims to be made against each tax is unknown at this time.

The bill's caption refers to “the strong families credit …, ” suggesting one credit.  However, the bill creates four strong family credits. All credits appear, but not unambiguously, to refer back to the credit created in the Franchise Tax chapter of the Tax Code for definitions and credit maximums. This analysis assumes that there is a fiscal year 2024 $25 million aggregate maximum for all credits applicable to all four tax types (the amount escalating in subsequent years). If this assumption is incorrect; if the $25 million maximum applies to each strong family credit associated with a tax type, the loss in fiscal 2024 would be $100 million—not $25 million.

There would be effects on the Economic Stabilization Fund (ESF) balance limit and consequent effects for GR reserves and transfers to ESF. Because pertinent tax revenue is initially deposited to the general revenue fund, the reduction in tax revenue in the 2024-25 biennium would reduce the 2026-27 ESF balance limit by ten percent of the reduction in tax, reducing 2025 severance tax reserves for transfer to the ESF by the amount of the balance limit reduction, and increasing available GR in 2025 by the amount of reduction of the reserves, however that amount is not expected to be significant.

The administrative cost estimate includes the funds to hire five (5) Tax Analysts II FTEs that would be needed to certify eligible entities as well as recertify and revoke the designation as an eligible entity. The bill lacks an application process for the tax credit separate from the regular filing of tax reports. Without a separate application process, it would be an administrative burden to determine exactly when the maximum allowed credit is reached and which taxpayers, across each tax type outlined in the bill, claimed the credit before that cap was reached.

In addition to the cost estimate, the bill as written presents multiple administrative issues for the Comptroller's office. Once the credit maximum is reached, the Comptroller's office would have to disallow claimed credits, which would result in underpayment of taxes and multiple delinquency notices and the assessment of underpayment penalties. Compounding the difficulties is the fact that there are different reporting periods and tax return due dates for each of the tax types in the bill. Furthermore, it would be very difficult to apply the credit against severance taxes, as taxpayers also continuously file amended returns within the four-year statute of limitations for audit-related tax reimbursements and marketing costs. The final amount of taxes due for a period may not be known until after four-years from the due date of the reporting period.

Technology

There would be a one-time technology cost to the Comptroller's office of $576,000 for 3,840 software programming hours to update the systems needed to implement the provisions of this bill.

Local Government Impact

No fiscal implication to units of local government is anticipated.