LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 77th Regular Session May 7, 2001 TO: Honorable Rene Oliveira, Chair, House Committee on Ways & Means FROM: John Keel, Director, Legislative Budget Board IN RE: SB1689 by Ellis, Rodney (Relating to the franchise tax.), As Engrossed ************************************************************************** * Estimated Two-year Net Impact to General Revenue Related Funds for * * SB1689, As Engrossed: negative impact of $(300,000,000) through * * the biennium ending August 31, 2003. * ************************************************************************** General Revenue-Related Funds, Five-Year Impact: **************************************************** * Fiscal Year Probable Net Positive/(Negative) * * Impact to General Revenue Related * * Funds * * 2002 $(250,000,000) * * 2003 (50,000,000) * * 2004 (50,000,000) * * 2005 (50,000,000) * * 2006 (50,000,000) * **************************************************** All Funds, Five-Year Impact: ***************************************************** * Fiscal Year Probable Revenue Gain/(Loss) from * * General Revenue Fund * * 0001 * * 2002 $(250,000,000) * * 2003 (50,000,000) * * 2004 (50,000,000) * * 2005 (50,000,000) * * 2006 (50,000,000) * ***************************************************** Fiscal Analysis The bill amends Chapter 171 of the Tax Code, relating to the franchise tax. Section 1 of the bill amends Tax Code Section 171.052 to identify corporations exempt from the franchise tax, because of the corporation's payment of taxes based on gross premiums under the Insurance Code. Section 1 would have no fiscal impact upon the state. Section 2 of the bill would alter the tax treatment of the business loss carry forward when a merger occurred. Current Comptroller policy is stated in the language that the bill would add to Section 171.110(e). The policy is to allow a business loss carry-forward only by the corporation that incurred the loss. Under that policy the loss may not be transferred to or claimed by another entity, including the survivor of a merger if the loss were incurred by the corporation that did not survive the merger. Section 2 of the bill would also add Subsection (k) to Section 171.110 of the Tax Code. The new subsection would allow a surviving corporation of a merger to claim the business of the non-surviving corporation for reports due on or after January 1, 2004. The business loss could be carried forward for not more than five years following the merger or until the losses are exhausted. Section 2 would negatively impact franchise tax revenues by reversing Comptroller policy consistently taken in refund claims and litigation with taxpayers over the treatment of business losses in a merger. The State would be liable for refunds of $200 million, which would be made in fiscal year 2002. Further, beginning with fiscal 2002, the State would lose $50 million per year from the revised treatment of business loss carry-forwards in cases of corporate mergers. Methodology This estimate is based on analyses by the Comptroller's Office of franchise tax records. Local Government Impact No fiscal implication to units of local government is anticipated. Source Agencies: 304 Comptroller of Public Accounts LBB Staff: JK, SD, WP, CT