LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 83RD LEGISLATIVE REGULAR SESSION April 22, 2013 TO: Honorable John Davis, Chair, House Committee on Economic & Small Business Development FROM: Ursula Parks, Director, Legislative Budget Board IN RE:HB800 by Murphy (Relating to a sales and use tax exemption and a franchise tax credit related to certain research and development activities.), Committee Report 1st House, Substituted Estimated Two-year Net Impact to General Revenue Related Funds for HB800, Committee Report 1st House, Substituted: a negative impact of ($221,156,000) through the biennium ending August 31, 2015. Additionally, the bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($18,000,000) for the 2014-15 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.
LEGISLATIVE BUDGET BOARD
Austin, Texas
FISCAL NOTE, 83RD LEGISLATIVE REGULAR SESSION
April 22, 2013
TO: Honorable John Davis, Chair, House Committee on Economic & Small Business Development FROM: Ursula Parks, Director, Legislative Budget Board IN RE:HB800 by Murphy (Relating to a sales and use tax exemption and a franchise tax credit related to certain research and development activities.), Committee Report 1st House, Substituted
TO: Honorable John Davis, Chair, House Committee on Economic & Small Business Development
FROM: Ursula Parks, Director, Legislative Budget Board
IN RE: HB800 by Murphy (Relating to a sales and use tax exemption and a franchise tax credit related to certain research and development activities.), Committee Report 1st House, Substituted
Honorable John Davis, Chair, House Committee on Economic & Small Business Development
Honorable John Davis, Chair, House Committee on Economic & Small Business Development
Ursula Parks, Director, Legislative Budget Board
Ursula Parks, Director, Legislative Budget Board
HB800 by Murphy (Relating to a sales and use tax exemption and a franchise tax credit related to certain research and development activities.), Committee Report 1st House, Substituted
HB800 by Murphy (Relating to a sales and use tax exemption and a franchise tax credit related to certain research and development activities.), Committee Report 1st House, Substituted
Estimated Two-year Net Impact to General Revenue Related Funds for HB800, Committee Report 1st House, Substituted: a negative impact of ($221,156,000) through the biennium ending August 31, 2015. Additionally, the bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($18,000,000) for the 2014-15 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.
Estimated Two-year Net Impact to General Revenue Related Funds for HB800, Committee Report 1st House, Substituted: a negative impact of ($221,156,000) through the biennium ending August 31, 2015.
Additionally, the bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($18,000,000) for the 2014-15 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 2014 ($91,666,000) 2015 ($129,490,000) 2016 ($131,990,000) 2017 ($134,590,000) 2018 ($137,190,000)
2014 ($91,666,000)
2015 ($129,490,000)
2016 ($131,990,000)
2017 ($134,590,000)
2018 ($137,190,000)
All Funds, Five-Year Impact: Fiscal Year Probable (Cost) fromGeneral Revenue Fund1 Probable Revenue (Loss) fromGeneral Revenue Fund1 Probable Revenue (Loss) fromProperty Tax Relief Fund304 Probable Revenue (Loss) fromCities 2014 ($4,066,000) ($87,600,000) $0 ($16,200,000) 2015 ($3,290,000) ($126,200,000) ($18,000,000) ($23,300,000) 2016 ($3,290,000) ($128,700,000) ($19,000,000) ($23,700,000) 2017 ($3,290,000) ($131,300,000) ($19,000,000) ($24,300,000) 2018 ($3,290,000) ($133,900,000) ($20,000,000) ($24,700,000) Fiscal Year Probable Revenue (Loss) fromTransit Authorities Probable Revenue (Loss) fromCounties and Special Districts Change in Number of State Employees from FY 2013 2014 ($5,500,000) ($2,800,000) 40.0 2015 ($7,900,000) ($4,000,000) 40.0 2016 ($8,000,000) ($4,000,000) 40.0 2017 ($8,200,000) ($4,100,000) 40.0 2018 ($8,400,000) ($4,200,000) 40.0
Fiscal Year Probable (Cost) fromGeneral Revenue Fund1 Probable Revenue (Loss) fromGeneral Revenue Fund1 Probable Revenue (Loss) fromProperty Tax Relief Fund304 Probable Revenue (Loss) fromCities 2014 ($4,066,000) ($87,600,000) $0 ($16,200,000) 2015 ($3,290,000) ($126,200,000) ($18,000,000) ($23,300,000) 2016 ($3,290,000) ($128,700,000) ($19,000,000) ($23,700,000) 2017 ($3,290,000) ($131,300,000) ($19,000,000) ($24,300,000) 2018 ($3,290,000) ($133,900,000) ($20,000,000) ($24,700,000)
2014 ($4,066,000) ($87,600,000) $0 ($16,200,000)
2015 ($3,290,000) ($126,200,000) ($18,000,000) ($23,300,000)
2016 ($3,290,000) ($128,700,000) ($19,000,000) ($23,700,000)
2017 ($3,290,000) ($131,300,000) ($19,000,000) ($24,300,000)
2018 ($3,290,000) ($133,900,000) ($20,000,000) ($24,700,000)
Fiscal Year Probable Revenue (Loss) fromTransit Authorities Probable Revenue (Loss) fromCounties and Special Districts Change in Number of State Employees from FY 2013 2014 ($5,500,000) ($2,800,000) 40.0 2015 ($7,900,000) ($4,000,000) 40.0 2016 ($8,000,000) ($4,000,000) 40.0 2017 ($8,200,000) ($4,100,000) 40.0 2018 ($8,400,000) ($4,200,000) 40.0
2014 ($5,500,000) ($2,800,000) 40.0
2015 ($7,900,000) ($4,000,000) 40.0
2016 ($8,000,000) ($4,000,000) 40.0
2017 ($8,200,000) ($4,100,000) 40.0
2018 ($8,400,000) ($4,200,000) 40.0
Fiscal Analysis
This bill would amend Chapter 151, Tax Code, regarding the limited sales and use tax, and Chapter 171, Tax Code, regarding the franchise tax. The bill would amend Chapter 151 to add new Section 151.3182 to provide an exemption from tax for depreciable tangible personal property directly used in qualified research under certain conditions. The conditions are that the person be engaged in qualified research and that the person not claim as a taxable entity under the franchise tax a credit for research and development expenses, as provided in the bill, on the report for the period during which the sales tax exemption was taken. The new section also would provide that the Comptroller make a biennial report to the Legislature and Governor regarding the exemption. The bill would amend Chapter 171 to add new Subchapter M to provide for a tax credit for certain research and development activities. The bill would define "qualified research" and "qualified research expense" by reference to the Internal Revenue Code with the qualification that the research and expenses must occur in this state. The bill would provide that a taxable entity is not eligible for a credit for qualified research expense on a report covering a period in which the entity or a member of a combined group that includes that entity received a sales tax exemption under the new Section 151.3182. The bill would provide that the credit, for a period covered by a franchise tax report of an eligible taxable entity, would equal 5 percent (or in the case of an entity that contracts for the performance of qualified research with an institution of higher education, 6.25 percent) of the difference between the qualified research expenses incurred during the period and 50 percent of the average amount of qualified research expenses during the three preceding periods. If during any of the three preceding periods the taxable entity had no qualified research expenses, the credit would equal 2.5 percent (or in the case of an entity that contracts for the performance of qualified research with an institution of higher education, 3.125 percent) of the qualified research expenses incurred during the period. The bill would limit the amount of credit claimed including credit carried forward from prior reports to 50 percent of the franchise tax due before any other applicable credits. Credits that could not be used on a report due to the limitation could be carried forward until all of the credit had been claimed. The bill would specify how qualified research expenses would be calculated for taxable entities that acquire or dispose of other taxable entities that have qualified research expenses. A taxable entity could not transfer credits to another entity unless all of the assets of the taxable entity are transferred. The Comptroller would be required to adopt rules and forms necessary to implement the credit, and would also be required to make a biennial report to the Legislature and Governor regarding the credit. The franchise tax provisions would apply only to reports due on or after January 1, 2014. The bill would take effect January 1, 2014.
This bill would amend Chapter 151, Tax Code, regarding the limited sales and use tax, and Chapter 171, Tax Code, regarding the franchise tax. The bill would amend Chapter 151 to add new Section 151.3182 to provide an exemption from tax for depreciable tangible personal property directly used in qualified research under certain conditions. The conditions are that the person be engaged in qualified research and that the person not claim as a taxable entity under the franchise tax a credit for research and development expenses, as provided in the bill, on the report for the period during which the sales tax exemption was taken. The new section also would provide that the Comptroller make a biennial report to the Legislature and Governor regarding the exemption. The bill would amend Chapter 171 to add new Subchapter M to provide for a tax credit for certain research and development activities. The bill would define "qualified research" and "qualified research expense" by reference to the Internal Revenue Code with the qualification that the research and expenses must occur in this state. The bill would provide that a taxable entity is not eligible for a credit for qualified research expense on a report covering a period in which the entity or a member of a combined group that includes that entity received a sales tax exemption under the new Section 151.3182. The bill would provide that the credit, for a period covered by a franchise tax report of an eligible taxable entity, would equal 5 percent (or in the case of an entity that contracts for the performance of qualified research with an institution of higher education, 6.25 percent) of the difference between the qualified research expenses incurred during the period and 50 percent of the average amount of qualified research expenses during the three preceding periods. If during any of the three preceding periods the taxable entity had no qualified research expenses, the credit would equal 2.5 percent (or in the case of an entity that contracts for the performance of qualified research with an institution of higher education, 3.125 percent) of the qualified research expenses incurred during the period. The bill would limit the amount of credit claimed including credit carried forward from prior reports to 50 percent of the franchise tax due before any other applicable credits. Credits that could not be used on a report due to the limitation could be carried forward until all of the credit had been claimed. The bill would specify how qualified research expenses would be calculated for taxable entities that acquire or dispose of other taxable entities that have qualified research expenses. A taxable entity could not transfer credits to another entity unless all of the assets of the taxable entity are transferred.
The Comptroller would be required to adopt rules and forms necessary to implement the credit, and would also be required to make a biennial report to the Legislature and Governor regarding the credit. The franchise tax provisions would apply only to reports due on or after January 1, 2014. The bill would take effect January 1, 2014.
Methodology
Data from the National Science Foundation on funds spent for business research and development (R&D) by companies in Texas and on the distribution of such expenditures by type were used to estimate amounts of business R&D expenditures on items of depreciable tangible personal property (namely, software and equipment with a useful life in excess of one year) currently subject to sales and use tax, reduced by the portion expected to be exempt under other provisions of the Tax Code, extrapolated through 2018, adjusted for the effective date, and multiplied by the state sales tax rate to estimate the probable effects on sales tax collections. Effects on units of local government were estimated proportionately. The estimated impact of the franchise tax provisions is based on data on the prior research and development credit that existed from 2000 to 2007. The estimate was modified to account for the differences between the franchise tax as it now exists and the tax that applied during earlier periods and of the interaction of the bill's sales tax and franchise tax provisions. Because of the much larger impact arising from the sales tax exemption, the franchise tax fiscal impact reflects estimated franchise tax credits available to taxable entities with low sales tax liability, in many cases because of contracts with the federal government.
Technology
There would be a one-time technology cost of $776,000 in fiscal year 2014 for programming and system support costs.
Local Government Impact
There would be a corresponding loss of sales and use tax revenue to local taxing jurisdictions.
Source Agencies: 304 Comptroller of Public Accounts
304 Comptroller of Public Accounts
LBB Staff: UP, RB, SD, KK
UP, RB, SD, KK