Honorable Morgan Meyer, Chair, House Committee on Ways & Means
FROM:
Jerry McGinty, Director, Legislative Budget Board
IN RE:
HB391 by Goldman (Relating to the repeal of the franchise tax.), As Introduced
Estimated Two-year Net Impact to General Revenue Related Funds for HB391, As Introduced : a negative impact of ($7,810,620,800) through the biennium ending August 31, 2025.
Additionally, the bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($3,784,298,000) for the 2024-25 biennium. Any loss to the Property Tax Relief Fund must be made up with an equal amount of General Revenue to fund the Foundation School Program.
General Revenue-Related Funds, Five- Year Impact:
Fiscal Year
Probable Net Positive/(Negative) Impact to General Revenue Related Funds
2024
($4,298,889,000)
2025
($3,511,731,800)
2026
($4,496,327,000)
2027
($4,597,843,000)
2028
($4,721,518,000)
All Funds, Five-Year Impact:
Fiscal Year
Probable Revenue (Loss) from General Revenue Fund 1
Probable Revenue (Loss) from Property Tax Relief Fund 304
Probable Revenue Gain from Foundation School Fund 193
Probable Revenue (Loss) from Cities
2024
($4,319,449,000)
($1,871,377,000)
$20,560,000
($2,680,000)
2025
($4,421,596,000)
($1,912,921,000)
$22,763,000
($4,840,000)
2026
($4,521,520,000)
($1,958,227,000)
$25,193,000
($5,120,000)
2027
($4,625,656,000)
($2,005,584,000)
$27,813,000
($5,400,000)
2028
($4,752,222,000)
($2,062,857,000)
$30,704,000
($5,690,000)
Fiscal Year
Probable Revenue (Loss) from Transit Authorities
Probable Revenue (Loss) from Counties and Special Districts
Probable Revenue Gain from General Revenue Fund 1
Probable Revenue (Loss) from Economic Stabilization Fund 599
2024
($890,000)
($610,000)
$0
$0
2025
($1,610,000)
($1,100,000)
$887,101,200
$0
2026
($1,700,000)
($1,160,000)
$0
($714,085,000)
2027
($1,790,000)
($1,220,000)
$0
($28,563,000)
2028
($1,890,000)
($1,290,000)
$0
($29,706,000)
Fiscal Analysis
The bill would repeal the franchise tax. A taxable entity would no longer be required to file a franchise tax report or pay a tax on the taxable entity's taxable margin for the period ending on December 31, 2023. However, Chapter 171, would continue to apply to audits, deficiencies, redeterminations, and refunds of any tax due or collected under Chapter 171 until barred by limitations.
The repeal of the franchise tax would not affect: the taxable entities' status under Subchapter F (Forfeiture of Corporate and Business Privileges), G (Forfeiture of Charter or Certificate of Authority), or H (Enforcement); the ability of the state to take action under those Subchapters for actions that took place before the repeal; or the right of a taxable entity to contest forfeiture, revocation, lawsuit, or appointment of a receiver under those Subchapters.
The bill would take effect January 1, 2024.
Methodology
This estimate is based on estimated franchise tax liability in the 2024-2025 Biennial Revenue Estimate extrapolated to subsequent years.
Under current law companies may claim either a historical structure credit against certain insurance tax or franchise tax. However, the historical structure credit is only listed in Chapter 171 so repeal of Chapter 171 would eliminate the historical structure credit for insurance tax as well.
Under current law companies may claim either a sales tax research and development (R&D) tax exemption for certain depreciable property or a franchise tax R&D credit. Certain companies elect to claim the franchise tax R&D credit and pay sales tax on items that would be exempt under Section 151.3182 of the Tax Code (certain property used in R&D) because the benefit of the franchise tax R&D credit is greater than the amount of sales tax paid. This analysis assumes companies able to claim the sales tax R&D exemption would do so if the franchise tax were repealed.
Adjusted for the effective date of the bill, this analysis assumes a reduction in state sales tax revenue of approximately 25 million dollars, and proportional reductions in local sales tax revenue, beginning in fiscal year 2024 as companies switch from the franchise tax R&D credit to the sales tax R&D exemption should Chapter 171 of the Tax Code be repealed.
There would be effects on the Economic Stabilization Fund (ESF) balance limit and consequent effects for GR reserves and transfers to ESF. Because franchise and sales 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. This effect, and associated reduction in ESF investment earnings, is indicated separately in the tables below from the direct effect of the tax revenue reduction. There would be a further effect on ESF interest earnings allocable to GR; however, the interest effects are provisionally treated as negligible and not included in these estimates. These effects are estimated based on reserves and transfers relative to the ESF balance as estimated in the 2024-25 Biennial Revenue Estimate and adjusted for the effects of SB 30 As Engrossed.
Local Government Impact
There would be a proportional loss of sales and use tax revenue from local taxing jurisdictions related to companies switching from the R&D franchise tax credit to the R&D sales tax exemption.