Topic:
TAXATION (GENERAL); HEALTH FACILITIES; INSURANCE (GENERAL); HEALTH MAINTENANCE ORGANIZATIONS; LEGISLATION; TAX CREDITS; STATISTICAL INFORMATION;
Location:
INSURANCE; TAXATION;

OLR Research Report


January 4, 2006

 

2006-R-0004

INSURANCE PREMIUM TAX

By: Janet L. Kaminski, Associate Legislative Attorney

You asked for a history of Connecticut's insurance premium tax law, the estimated FY 06 premium tax revenue, a summary of Iowa's law that reduced its premium tax to 1%, and a copy of New Hampshire's proposal to do the same. You also asked if state law prohibits an insurance company from transferring tax credits to affiliate insurance companies in Connecticut.

SUMMARY

Since 1995, Connecticut law has required insurance companies and health care centers (e.g., health maintenance organizations or HMOs) to pay an annual tax of 1.75% of net direct premiums and subscriber charges, respectively. Numerous exemptions from the tax on health care centers' subscriber charges have since been enacted. For example, HMO contracts written to provide health care coverage for state employees, Medicare patients, Medicaid recipients, retired teachers, or municipal employees are exempt from the 1.75% tax. These exemptions do not apply to the 1.75% premium tax on insurance companies. Before 1995, the insurance company premium tax rate was 2.75%, 2.5%, and 2%.

In addition, since 1976 state law has required a person or entity who obtains insurance from an unauthorized insurer (an insurance company not licensed to do business in the state) to pay an annual tax of 4% of gross premiums charged by the unauthorized insurer. The tax rate was previously 3%.

The Office of Fiscal Analysis' estimate for the FY 06 premium tax revenue is $264.9 million, as of its November 15, 2005 statement. (This estimate includes taxes on health care centers, domestic and foreign insurers, and unauthorized insurance.) The state collected $244,111,263 in FY 05 and $222,419,343 in FY 04.

There is no specific statutory prohibition against transferring tax credits to affiliate insurers, according to the Connecticut Department of Revenue Services (DRS). DRS noted that there are several tax credits that may be claimed against the insurance premiums tax and that, by statute, may be assigned, including (1) the Insurance Reinvestment Fund Tax Credit, (2) the Urban and Industrial Reinvestment Fund Tax Credit, and (3) the Connecticut Insurance Guaranty Association Tax Credit. Iowa permits the transfer of some tax credits. New Hampshire allows a transfer of an extra credit in one particular circumstance.

The Iowa legislature incrementally decreased its state's insurance premium tax from 2% to 1% over four years (2002 Iowa Acts S.F. 2318, copy enclosed). The New Hampshire legislature is considering a premium tax reduction for property-casualty insurers from 2% to 1% (2005 HB 678-FN, copy enclosed).

CONNECTICUT'S INSURANCE PREMIUM TAX HISTORY

Domestic Insurance Company

Each domestic insurance company must annually pay a tax on the total net direct premiums received during the preceding calendar year from policies written on property or risks in Connecticut (CGS 12-202). The tax rate payable is currently 1.75% (PA 94-4, May Sp. Sess., effective January 1, 1995).

Previously, the rate was (1) 2.5% on net direct premiums received before July 1, 1973 and 2% on net direct premiums received on and after July 1, 1973 (PA 72-285, effective July 1, 1972); (2) 2.5% on net direct life insurance premiums and 2.75% on all other net direct premiums (PA 61-604, effective June 9, 1961); and (3) 1.75% on net direct life insurance premiums and 2% on all other net direct premiums (1949 Rev., 1884).

Foreign Insurance Company

Each insurance company incorporated by or organized under the laws of any other state or foreign government and doing business in Connecticut must annually pay a tax of 1.75% of all net direct premiums received in the preceding year from policies written on property or risks located in Connecticut, excluding premiums for ocean marine insurance. If the company ceases to write new policies, it must still pay tax on any renewal premiums received from the business remaining in force in Connecticut at the rate applicable when the company ceased to write new business (CGS 12-210, PA 94-4, May Sp. Sess., effective January 1, 1995).

Previously, the rate was (1) 2% (PA 72-285, effective July 1, 1972) and (2) 1.75% on net direct life insurance premiums and 2% on all other net direct premiums (1949 Rev., 1884).

Health Care Center

Each health care center (e.g., health maintenance organization) must annually pay a tax of 1.75% of the total net direct subscriber charges received during the preceding calendar year on any new or renewal contract or policy approved by the insurance commissioner (CGS 12-202a, PA 94-4, May Sp. Sess., effective January 1, 1995).

Since 1997, the legislature has enacted several exemptions to the health care center subscriber charge tax, as follows:

1. Any new or renewal contract or policy entered into with the state to provide health care coverage to state employees, retirees, and their dependents (PA 97-11);

2. Any subscriber charges received from the federal government to provide coverage for Medicare patients (PA 97-11);

3. Any new or renewal contract or policy entered into with the state to provide health care coverage to recipients of Medicaid under the Medicaid managed care program, HUSKY, or the state-administered general assistance program (PA 98-110);

4. Any new or renewal contract or policy entered into with the state to provide health care coverage to retired teachers, spouses, or surviving spouses covered by plans offered by the state teachers' retirement system (PA 00-174);

5. Any new or renewal contract or policy entered into through the Municipal Employee Health Insurance Plan (MEHIP) to provide health care coverage to employees of a municipality or a nonprofit organization and their dependents (PA 01-30);

6. Any new or renewal contract or policy entered into through MEHIP to provide health care coverage to individuals eligible for a health coverage tax credit and their dependents (PA 03-6, June 30 Sp. Sess.); and

7. Any new or renewal contract or policy entered into on or after July 1, 2005 through MEHIP to provide health care coverage to employees of community action agencies and individuals eligible for a municipal employee's retirement benefit and their dependents (PA 05-238).

Insured by Unauthorized Insurer

Any insured in Connecticut who obtains insurance from an unauthorized insurer (an insurance company not licensed to do business in the state) must annually pay a tax of 4% of gross premiums charged for the insurance, excluding wet marine and transportation insurance, and applicable to the risks or exposures located in Connecticut. “Premiums” include all premiums, membership fees, assessments, dues, and any other considerations for the insurance. The law does not apply to individual life or individual disability insurance (CGS 38a-277). PA 76-193 increased the rate from 3% to 4%.

INSURANCE PREMIUM TAX REDUCTION

Iowa

The Iowa legislature gradually decreased its state's tax on gross insurance premiums from 2% to 1%. For a life insurance company or health services association, the tax rate is as follows: before calendar year 2003, 2%; for 2003, 1.75%; 2004, 1.5%; 2005, 1.25%; and for 2006 and after, 1%. For all other insurance companies or associations, the rate is as follows: before calendar year 2004, 2%; for 2004, 1.75%; 2005, 1.5%; 2006, 1.25%; and for 2007 and after, 1% (Iowa Code 432.1).

New Hampshire

In 2004, the New Hampshire legislature established a committee to study decreasing the insurance premium tax (2004 HB 1311-FN, effective May 7, 2004). As a result of the committee's study, the Commerce Committee introduced HB 678-FN in 2005 (copy enclosed). The bill decreases the insurance premium tax rate from 2% to 1% for

property and casualty insurance business. Under the bill, the tax rate remains 2% for insurance against bodily injury, accidental death, or sickness, including health service corporations and health maintenance organizations.

TRANSFERRING TAX CREDITS TO AFFILIATE INSURERS

Connecticut

There is no specific statutory prohibition against transferring tax credits to affiliate insurers, according to DRS.  Tax credits, like tax exemptions, are a matter of legislative grace, the burden of proving entitlement is on the taxpayer, and they should be interpreted to allow only what falls within the terms of the statute (Bell Atlantic Nynex Mobile, Inc. v. Commissioner, 273 Conn. 240 (2005)).  Thus, tax credits may only be assigned as specifically provided in the applicable tax credit statute, according to DRS.

 

There are several tax credits that may be claimed against the insurance premiums tax and that, by statute, may be assigned, including (1) the Insurance Reinvestment Fund Tax Credit (CGS 38a-88a(l)), (2) the Urban and Industrial Reinvestment Fund Tax Credit (CGS 32-9t(n)), and (3) the Connecticut Insurance Guaranty Association Tax Credit (CGS 38a-841).  The Insurance Guaranty Association credit is the only one that may be assigned multiple times.  The other two credits may only be assigned by the taxpayer (i.e., there is no provision for subsequent assignments by the taxpayer's assignee).

Questions relating to premium tax liability, tax credits, and tax credit assignments should be directed to the Department of Revenue Services.

Iowa

Iowa permits numerous tax credits against an insurer's premium tax liability, including:

1. property rehabilitation (i.e. historic preservation) tax credit (Iowa Code 432.12A and 404A.2);

2. venture capital fund investment tax credit (Iowa Code 432.12B and 15E.51);

3. investment tax credits (Iowa Code 432.12C and 15E.43);

4. Endow Iowa fund tax credit (Iowa Code 432.12D and 15E.305);

5. wind energy production tax credit (Iowa Code 432.12E and 476B.2);

6. renewable energy tax credit (Iowa Code 432.12E and 476C.2);

7. economic development region revolving fund contribution tax credit (Iowa Code 432.12F and 15E.232);

8. wage-benefits tax credit (Iowa Code 432.12G and 15H.2);

9. Iowa Fund of Funds capital investment contingent tax credit (Iowa Code 15E.66); and

10. eligible housing business tax credit (Iowa Code 15E.193B.6.a)

Half of these tax credits are transferable, according to the Iowa Department of Revenue, including the credits for (1) property rehabilitation, (2) wind energy production, (3) renewable energy production, (4) Iowa Fund of Funds investment, and (5) eligible housing business.

New Hampshire

New Hampshire permits an insurer to take as a credit against its business profits tax liability the amount paid as insurance premium tax, according to the New Hampshire Department of Revenue Administration. If the insurer files as a single company, it is not permitted to assign the tax credit. If it files as part of a group (i.e., combined filing) and it has an excess credit (i.e., the insurance premium tax paid exceeds the business profit tax due), it may assign the extra credit to another company within the group that is also subject to the premium tax (N.H. Rev. Stat. Ann. 400-A:32 and 77-A:5, N.H. Code Admin. R. Ann. [Rev] 306.01, et seq.)

JLK:dw