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State Tax

The Issue

Tax reform remains an issue of major interest and concern to NAIFA—and not just on the federal level. As state governments continue to look for revenue to reduce budgetary red ink, state legislators continue to consider proposals that could impact the tax treatment of life insurers, producers, and insurance products.

Background

State-level efforts to tax insurance products and services fall into three main categories:

  • Raising Existing Tax Rates: Most states impose a premium tax as the primary form of life insurer taxation. With a premium tax, a specific percentage of all life insurance premiums collected by the company are paid to the state. While the premium tax rate may seem low in comparison to the state’s general corporate tax rate, the premium tax is applied to the insurer’s gross premium receipts, and is assessed and paid regardless of the insurer’s expenses or profitability. In most cases, the premium tax generates a greater amount of tax payments than would application of the traditional corporate income tax. States often propose premium tax increases as a way to increase state revenue. State legislators also occasionally propose increases to the current tax rates on producer commissions.
  • Broadening the Existing Tax Base: The life insurance premium tax is typically the only tax levied on insurers in most states. However, states often try to broaden the state’s tax base to increase revenue by expanding the types of products and services that are subject to taxation. One example of how states attempt to do this is by applying a premium tax on annuity as well as life insurance premiums. While only seven states tax annuity premiums and 1991 was the last time we saw a successful effort to levy a new annuity tax, recent years have seen several (unsuccessful) efforts by states to broaden their tax base by enacting a new tax on annuity premiums. States also attempt to broaden the existing tax base by considering a sales tax on the sale of life insurers’ products or by taxing the inside build-up and death benefit of life insurance. Efforts to broaden the tax base in these ways have been unsuccessful, and no state currently imposes a sales tax on insurance or taxes the inside build-up or death benefit.
  • Proposals to Repeal Current Tax Credits: Life insurers typically receive “credits” against taxes and assessments placed on them by the state. For example, in most states insurers can use the guaranty fund assessment paid by the insurer (to fund the state’s guaranty fund) to offset a portion of their premium taxes or other tax liabilities that otherwise would be due. State lawmakers sometimes try to repeal this tax credit as a way to generate new sources of revenue.

NAIFA Position

NAIFA generally believes new efforts to expand or increase state-level taxation of the insurance industry would be excessive, and we will strongly oppose efforts to increase the taxation of insurers, producers, and our products and services.

As an example of NAIFA’s influence in the states, several years ago in Oregon a fast moving bill would have taxed the inside build-up and death benefit of life insurance. Although the hearing on the bill was scheduled on less than two days’ notice, a sizable contingent of NAIFA-Oregon members dropped everything to travel several hours to the Capitol to testify against this bill. The end result was that the bill’s sponsor himself did not vote in favor of his own bill.