Honorable Morgan Meyer, Chair, House Committee on Ways & Means
FROM:
Jerry McGinty, Director, Legislative Budget Board
IN RE:
HB1508 by Metcalf (Relating to the repeal of the franchise tax.), As Introduced
Estimated Two-year Net Impact to General Revenue Related Funds for HB1508, As Introduced: a negative impact of ($11,657,181,000) through the biennium ending August 31, 2027.
Additionally, the bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($4,176,692,000) for the 2026-27 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
2026
($5,707,309,000)
2027
($5,949,872,000)
2028
($6,153,955,000)
2029
($6,437,619,000)
2030
($6,801,541,000)
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 (Loss) from Foundation School Fund 193
Probable Revenue (Loss) from Cities
2026
($5,703,645,000)
($1,951,649,000)
($3,664,000)
($17,600,000)
2027
($5,946,098,000)
($2,225,043,000)
($3,774,000)
($12,600,000)
2028
($6,150,068,000)
($2,449,291,000)
($3,887,000)
$0
2029
($6,433,616,000)
($2,644,127,000)
($4,003,000)
$0
2030
($6,797,418,000)
($2,845,341,000)
($4,123,000)
$0
Fiscal Year
Probable Revenue (Loss) from Transit Authorities
Probable Revenue (Loss) from Counties & Special Districts
2026
($5,800,000)
($4,300,000)
2027
($4,200,000)
($3,100,000)
2028
$0
$0
2029
$0
$0
2030
$0
$0
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, 2025. 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 Chapter 171 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, 2026.
Methodology
According to the Comptroller, this estimate is based on estimated franchise tax collections in the 2026-2027 Biennial Revenue Estimate extrapolated to subsequent years, and adjusted for the effect of repeal on certain tax credit and exemption claims.
Under current law companies may claim a historical structure credit against either insurance taxes or franchise tax under Chapter 172. The repeal of Chapter 171 would eliminate the historical structure credit for franchise tax but not for insurance tax. Credits formerly claimed against franchise tax would instead be claimed against insurance tax liabilities. This would result in reductions of revenue to the general revenue fund and foundation school fund that formerly would have been reductions to the property tax relief fund.
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, but not both. 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. Following the effective date of repeal of the franchise tax, one year would remain for R&D sales tax exemption claims, before the sales tax exemption expires December 31, 2026 as provided by current law. Some taxpayers that would have claimed R&D franchise tax credits in 2026 would instead claim sales tax exemptions, resulting in costs to the general revenue fund and to units of local government in fiscal years 2026 and 2027.
Local Government Impact
There would be a corresponding loss of sales and use tax revenue from local taxing jurisdictions displayed in the tables above.