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Insurance Premium Taxes Under Discussion in Florida and Connecticut

Insurance Premium Taxes Under Discussion in Florida and Connecticut

Policymakers in Florida and Connecticut appear to be moving in different directions as they evaluate the impact of insurance premium taxes in their respective states. Florida law currently provides for a salary credit against the insurance premium tax, which serves to partially offset insurers’ premium tax obligations based upon the salaries they pay to Florida workers. The idea behind the salary credit is to encourage insurers to hire Floridians. Unlike some other forms of business incentives, the salary credit by its very nature ensures that its goals are met— insurers must actually pay the salaries before the credit applies.

As technology has advanced, many insurance-related jobs can be housed anywhere on the country, or even across the world. However, despite increasing flexibility in where insurers’ businesses can be administered, Florida’s salary credit has been an unqualified success in attracting and retaining jobs in Florida. A 2015 report by the Florida Office of Insurance Regulation indicates that the insurance industry is responsible for more than 200,000 jobs in the state, comprising almost 2% of the statewide workforce.

Despite this success, some officials in Florida are looking at the possibility of repealing the salary credit. Insurers’ taxes, of course, are a factor in ratemaking, meaning that the net tax increase will flow through to consumers. Supporters of the repeal argue that the net tax increase generated by repealing the credit can be used to reduce other governmental fees, rendering the change revenue-neutral. While that may be true in isolation, it still would make the effective tax rate on insurance in Florida more than five times the standard corporate tax rate (because insurers are subject to both the premium tax and corporate income tax, with the corporate income tax providing only a partial offset against premium taxes). This is a difficult reality to accept in a state where insurance premiums already tend to be higher than in many other states. Further still, although a change could be revenue-neutral on a single-year basis, the salary credit enables all of the ancillary long-term benefits of job creation and retention– benefits that aren’t replicated from offsetting reductions of vehicle registration fees or similar fees.

Meanwhile, in Connecticut, Governor Dannel P. Malloy announced a different approach. In a state where the insurance industry accounts for about 60,000 jobs, Governor Malloy proposed to reduce the insurance premium tax from its current 1.75% to 1.5%. “There are simple and relatively inexpensive ways we can improve the business climate by making state government more predictable and sustainable,” said Governor Malloy in a statement published by the Hartford Courant. “The insurance industry has a long and storied history in Connecticut, and we must ensure that we maintain our competitive edge so they continue to thrive and grow in our state.”

The Governor’s proposal reportedly will mitigate the reduction in state revenues by limiting the amount of credits that can be applied against the insurance premium tax. Nonetheless, the proposed change will produce a greater advantage for Connecticut insurers as they conduct business in other states due to retaliatory tax provisions (which generally require an insurer to pay taxes in a foreign state based upon the greater of the foreign state’s premium tax rate or the applicable rate in the insurer’s home state).

Early reaction to Governor Malloy’s proposal was favorable from state legislators and from industry representatives, who pointed out that the lower tax rate and the beneficial effect on retaliatory tax calculations will help Connecticut-based insurers grow and compete across the country.