According to the Legislative Budget Board (LBB), SB 2206 is projected to have a significant negative fiscal impact on the state’s General Revenue Fund, primarily due to the creation of new franchise tax credits for research and development (R&D) expenditures. Over the 2026–2027 biennium, the estimated net revenue loss is approximately $247.9 million, escalating to $1.08 billion by the 2028–2029 biennium. This trend reflects the growing utilization of the credit over time as more businesses adjust to the incentive and claim eligible expenses.

The bill repeals the current R&D tax provisions and establishes new credit tiers: 8.722% for eligible expenses above a base threshold, 10.903% for expenses linked to collaborations with Texas higher education institutions, and lower rates for businesses without prior qualifying expenses. The total credit that can be claimed annually is capped at 50% of the entity's total franchise tax due, but unused credits can be carried forward for up to 20 years. Notably, the bill also includes a refundable credit mechanism for new veteran-owned businesses and low-revenue entities that otherwise owe no tax.

The Legislative Budget Board notes that the fiscal estimate for the initial years is offset slightly by the bill's repeal of a sales tax exemption on depreciable property used in R&D, which was set to expire under current law. However, as the new franchise tax credits are more generous and widely accessible than the provisions they replace, the overall effect is a substantial revenue decline. Importantly, the bill mandates that any decrease in contributions to the Property Tax Relief Fund due to the new credit structure must be backfilled by the Comptroller, creating an additional obligation on state finances.

There are no anticipated fiscal implications for local governments under this bill. The fiscal analysis relies heavily on historical taxpayer data adjusted for the new credit structure, and it excludes costs tied to carryforwards under the existing law, as those would occur regardless of SB 2206’s enactment.

SB 2206 presents a timely and strategically sound modernization of Texas’s research and development (R&D) tax incentive structure. By repealing the soon-to-expire sales tax exemption and replacing it with a more targeted, performance-based franchise tax credit, the bill supports innovation, strengthens partnerships with Texas institutions of higher education, and brings the state’s tax code into closer alignment with federal standards. This shift reduces administrative complexity, respects business autonomy, and avoids the creation of new bureaucracy—clear wins for the principles of limited government and free enterprise​.

The franchise tax credit created under SB 2206 is earned through real economic activity, rewarding businesses that increase their R&D investment in Texas. It offers higher credit rates for entities that partner with public or private higher education institutions, creating mutual public-private benefit. Credits are capped at 50% of tax liability, cannot be transferred, and must be claimed based on documentation already required by the IRS (Form 6765). These safeguards reduce the risk of abuse and ensure that relief is tied to verifiable investment.

However, the bill does come with fiscal and policy trade-offs. It narrows the tax base by offering relief only to a subset of businesses, which could create equity concerns for firms not engaged in R&D. More significantly, it carries a projected cost of over $1 billion by the 2028–29 biennium​. While some of this is offset by the repeal of the sales tax exemption, the long-term revenue loss is still substantial. As with any tax incentive, we must guard against unintended erosion of the state’s fiscal foundation.

Therefore, while Texas Policy Research recommends that lawmakers vote YES on SB 2206, we also recommend amendments to ensure the policy remains accountable, transparent, and fiscally responsible. These amendments should include:

• A sunset provision to trigger legislative review after a fixed period (e.g., 6 years),
• Transparency measures, including public reporting on the credit’s usage, distribution, and measurable economic impact,
• Fiscal guardrails, such as a cap on total statewide credit claims per fiscal year or mechanisms tied to state revenue performance.

These changes would help preserve the integrity of the tax code while still allowing Texas to foster innovation and attract high-value investment. This is not corporate welfare—it is a structured, performance-driven incentive. But like any such policy, it must be monitored and constrained to prevent it from becoming an open-ended tax preference.

In sum, SB 2206 as a pro-growth, pro-innovation measure, but full support is contingent on its alignment with long-term fiscal discipline and equitable tax policy. With thoughtful amendments, the bill can fulfill its purpose without compromising the broader principles that ensure Texas remains competitive, accountable, and fair.

• Individual Liberty: The bill advances individual liberty by expanding opportunities for innovators, entrepreneurs, and researchers to operate in a more supportive tax environment. By reducing tax barriers to conducting R&D in Texas, the bill enhances the freedom of individuals and firms to pursue innovation, take risks, and develop proprietary technologies. It does not impose mandates, restrictions, or regulations—only creates incentives for voluntary, productive behavior.
• Personal Responsibility: While the bill does not explicitly promote personal responsibility in a moral or behavioral sense, it does require action before reward. Businesses must make actual investments in R&D before receiving a tax credit, and the size of the credit is based on increases over past activity. This structure encourages long-term investment and risk-taking, reinforcing the idea that reward follows initiative. However, because access to the credit favors larger or more sophisticated firms with R&D capacity, some may see this as favoring scale over equal opportunity.
• Free Enterprise: This is the bill’s strongest alignment. The bill encourages free enterprise by reducing the tax burden on businesses that innovate and compete in open markets. It replaces a more opaque sales tax exemption with a clear, performance-based credit that rewards business behavior that benefits the broader economy, such as technological advancement, academic collaboration, and job creation. It avoids government control or subsidy, instead using tax relief to empower market participants.
• Private Property Rights: Although the bill doesn’t directly affect land or physical property rights, it does encourage the creation of intellectual property, an increasingly vital form of private property in a knowledge-based economy. By incentivizing R&D, the bill supports individuals and firms in developing and owning proprietary technologies, innovations, and processes. It reinforces the principle that creators should enjoy the benefits of their own labor and ingenuity.
• Limited Government: The bill is consistent with limited government in its structure and intent: it eliminates a sales tax exemption, consolidates incentives into one performance-based credit, and relies on federal documentation to minimize bureaucratic overhead. However, because it narrows the tax base and carries a significant long-term cost, it has the potential to strain state revenues or shift burdens to other taxpayers. The absence of a sunset clause or fiscal cap could challenge the principle of fiscal restraint unless amended. With proper oversight and safeguards, it remains solidly in line with limited government ideals.

• HB 4393 (Same As)