According to the Legislative Budget Board (LBB), HB 4735 is projected to result in a substantial fiscal impact to the state over the next two biennia due to the issuance of insurance tax credits to investors in certified rural development funds. According to the Legislative Budget Board (LBB), the bill would generate a net negative impact of $49.5 million to General Revenue-related funds through the 2026–2027 biennium, and an additional $100.5 million loss through the 2028–2029 biennium.

The legislation would permit the Texas Comptroller to allocate up to $300 million in investment authority, including $150 million in tax credit certificates, beginning in fiscal year 2026. These credits are redeemable by insurance companies over three years, 33% in each of the first two years and 34% in the third. This phased redemption schedule would reduce premium tax collections, which are split between the General Revenue Fund (75%) and the Foundation School Fund (25%).

On the administrative side, the bill would require the Comptroller to implement a new oversight system, with associated staffing and technology costs. The fiscal note estimates an annual administrative cost of $657,000 for seven new full-time employees and an initial technology expenditure of $2.88 million in fiscal 2026 to support application and compliance tracking systems. These costs are expected to be covered by application and participation fees, though the exact revenue from these sources remains uncertain.

To mitigate long-term fiscal risk, the bill includes a provision requiring rural development funds to reimburse the state upon exiting the program, based on either their “excess return” or a “state reimbursement amount” tied to job creation. However, the fiscal note raises questions about scenarios in which these reimbursement amounts might be negative, and whether additional credits would then be issued, suggesting some ambiguity in implementation. Furthermore, if the Comptroller determines by 2030 that the economic benefit of the program does not exceed the tax credits issued, the bill would prohibit acceptance of new applications after January 1, 2026.

In sum, while HB 4735 introduces a potentially impactful rural investment mechanism, its fiscal implications include significant short-term revenue losses, moderate administrative costs, and longer-term financial uncertainties that hinge on the economic performance of participating rural development funds.

HB 4735 proposes the creation of a rural investment incentive program in which private entities, such as insurance companies, receive state tax credits in exchange for investing in certified rural development funds (RDFs). These RDFs are then required to make loans or equity investments in small businesses located in rural or economically underserved areas of Texas. The stated goal of the bill is to stimulate private sector activity and job creation in regions that often struggle to attract capital.

However, the mechanism by which the bill operates—through the issuance of state insurance premium tax credits—raises substantial concerns for those who support free enterprise and limited government. While it may not involve direct appropriations, the bill uses the power of the tax code to steer private capital toward government-favored outcomes. This is, in effect, a form of economic intervention that distorts the natural allocation of resources and violates core market principles.

By incentivizing certain investments over others through tax advantages, HB 4735 empowers the state to pick winners and losers in the private marketplace. In doing so, it creates an uneven playing field—offering benefits only to those businesses or investors who participate in the state-sanctioned program. This undermines the principle that investment decisions should be based on merit, risk, and market opportunity, not government influence. Even with performance-based clawbacks and job creation requirements, the fundamental flaw remains: the government is inserting itself into decisions that should be left entirely to the private sector.

Moreover, the fiscal note accompanying the bill confirms that the program will result in a substantial loss of tax revenue—nearly $150 million over the next two biennia. These tax credits, while spread out over three years, represent forgone revenue that would otherwise support essential public services or contribute to broader tax relief. In this way, the bill shifts the financial burden from incentivized investors to the general taxpayer, all in service of a program that favors a targeted segment of the economy. That’s not limited government—it’s selective intervention.

Though the bill contains a pause mechanism that restricts future applications if the program does not generate more economic benefit than cost, this safeguard does not eliminate the problem. It only acknowledges the risk. Additionally, while the committee substitute version removed earlier language referencing Historically Underutilized Businesses (HUBs)—which may have raised concerns about social equity programming or DEI frameworks—the underlying issue remains one of market distortion and tax favoritism.

A principled free-market approach would focus on reducing broad regulatory and tax burdens for all businesses, especially those in rural areas, without creating new tax expenditures or state-managed investment frameworks. True economic development is best achieved by fostering a competitive, open environment where businesses rise and fall on their merits, not by creating complex, bureaucratic incentive programs.

For these reasons, and in defense of free enterprise, equal treatment under the law, and taxpayer neutrality, Texas Policy Research recommends that lawmakers vote NO on HB 4735. The program’s structure, while well-intentioned, represents a form of centralized economic planning that stands at odds with the principles of limited government and market freedom.

• Individual Liberty: The bill does not restrict or infringe on individual rights or freedoms. Participation in the rural development program is entirely voluntary for investors, development funds, and small businesses. In theory, the bill may indirectly support individual liberty by helping rural business owners access capital to pursue entrepreneurial ventures. However, because it introduces state influence over where capital flows, it still blurs the boundary between government facilitation and market freedom.
• Personal Responsibility: The bill contains performance-based provisions—like job creation targets and investment benchmarks—that suggest a level of accountability for those who participate. However, by offering tax credits to incentivize specific investment behavior, the state is reducing the risk burden on private investors and effectively softening the consequences of their decisions. This weakens the full expression of personal responsibility by introducing a form of state-backed cushion.
• Free Enterprise: This is where the bill most clearly violates a liberty principle. The bill distorts the free market by offering selective tax incentives to guide investment toward state-approved sectors and geographies. While the aim of supporting rural economies is laudable, doing so through government-managed incentives interferes with natural market forces. Rather than allowing capital to flow based on competition, innovation, and private risk-reward decisions, the state is tilting the scales—an approach that runs counter to the essence of free enterprise.
• Private Property Rights: The bill does not encroach on the right to own, use, or control private property. All participation is voluntary, and property owners retain full control over their businesses and assets. However, the tax credit scheme does raise philosophical concerns about fairness in taxation. By giving some businesses access to tax-advantaged capital, it potentially undermines the broader neutrality of the tax system.
• Limited Government: The bill creates a new program, authorizes new government oversight responsibilities, establishes compliance rules, and necessitates the hiring of new state employees to administer the program. Even though it's not a traditional spending bill, the use of tax credits represents a significant expansion of state involvement in the private sector, with an estimated fiscal impact exceeding $100 million over four years. This expansion of government activity is at odds with the principle of limiting government to its essential roles.