LEGISLATIVE BUDGET BOARD
Austin, Texas
FISCAL NOTE
75th Regular Session
April 2, 1997
TO: Honorable Tom Craddick, Chair IN RE: House Bill No. 2674
Committee on Ways & Means By: Isett
House
Austin, Texas
FROM: John Keel, Director
In response to your request for a Fiscal Note on HB2674 ( Relating
to the definition of Internal Revenue Code for the purposes
of the franchise tax.) this office has detemined the following:
Biennial Net Impact to General Revenue Funds by HB2674-As Introduced
Implementing the provisions of the bill would result in a net
negative impact of $(5,265,000) to General Revenue Related Funds
through the biennium ending August 31, 1999.
Fiscal Analysis
The bill would amend the Texas franchise tax law (Chapter 171
of the Tax Code) to adopt all federal tax law changes made since
1994. Since that date, two major federal tax bills have become
law: the Small Business Job Protection Act (P.L. 104-188) and
the Health Insurance Portability Act (P.L. 104-191).
The
Small Business Job Protection Act (SBJA) provisions applying
to the federal corporate income tax include:
(1) Liberalization
of subchapter S corporation organizational rules;
(2) An increase
in the maximum annual capital equipment expensing permitted
under IRC Section 179;
(3) Authorization of deductions for
pension contributions for new small businesses plans (SIMPLE);
(4)
Repeal of the reserve method currently allowed certain thrift
institutions in accounting for bad debts; and,
(5) A loss of
the 50 percent interest income exclusions for loans made to
an Employee Stock Option Plan (ESOP).
These federal law
changes took effect January 1, 1997. Other changes made by
the SBJA have no significant effect on the state's franchise
tax.
The Health Insurance Portability Act permits corporate
deductions for medical savings account contributions.
The
bill would permanently link the state's franchise tax base to
the Internal Revenue Code. All changes in federal tax law automatically
become part of Texas law without legislative approval. The bill
would apply to franchise tax payments and reports due on or
after the effective date. Payments and reports due before
the effective date would be governed by current law.
Methodolgy
Increased expensing of capital equipment would decrease a corporation's
franchise tax liability. Liberalizations of subchapter S corporation
rules would allow more corporations to qualify for the special
exemption from the officer compensation add back requirement
available under the franchise tax to S corporations, which could
decrease a firm's franchise tax liability. New federal deductions
for medical savings accounts and small business pension contributions
also would lower a taxpayer's franchise liability. The repeal
of the 50 percent interest income exclusion for ESOPs would
increase some firms' tax liability. The repeal of the bad debt
reserve method also would increase some firms' tax liability.
The net effect of all the changes would be a revenue loss to
the state.
The probable fiscal implications of implementing the provisions
of the bill during each of the first five years following passage
is estimated as follows:
Five Year Impact:
Fiscal Year Probable Revenue
Gain/(Loss) from
General Revenue
Fund
0001
1998 ($2,585,000)
1998 (2,680,000)
2000 (2,753,000)
2001 (2,895,000)
2002 (3,182,000)
Net Impact on General Revenue Related Funds:
The probable fiscal implication to General Revenue related funds
during each of the first five years is estimated as follows:
Fiscal Year Probable Net Postive/(Negative)
General Revenue Related Funds
Funds
1998 ($2,585,000)
1999 (2,680,000)
2000 (2,753,000)
2001 (2,895,000)
2002 (3,182,000)
Similar annual fiscal implications would continue as long as
the provisions of the bill are in effect.
No fiscal implication to units of local government is anticipated.
Source: Agencies: 304 Comptroller of Public Accounts
LBB Staff: JK ,RR ,CT