HD78 - Report of the Select Committee Studying Virginia's Gross Receipts Tax Imposed on Insurance Companies

Executive Summary:

House Joint Resolution No. 202, adopted by the 1996 Session of the General Assembly, established a select committee to study the gross receipts tax imposed on insurance companies. The resolution directs the select committee to ensure that the tax is equitable and is competitive with that of other states.

Virginia imposes a 2.25 percent gross premium tax on life and health, property and casualty, title, and other lines of insurance. In addition, insurers are assessed a 0.06 percent maintenance assessment. Companies writing certain types of insurance are also assessed a fire programs fund assessment, an automobile theft prevention assessment, and a flood prevention and protection fund assessment. Virginia also imposes a variety of regulatory fees. The Commonwealth assesses a retaliatory tax against insurers domiciled in other states if Virginia-domiciled insurers are subject to taxes and fees in those states that are greater than Virginia's taxes and fees. Conversely, Virginia-domiciled insurers must pay retaliatory taxes to other states which impose less in taxes and fees than would be imposed on insurers in those states.

The Commonwealth collected $240.3 million in taxes, fees and assessments on insurers doing business in this state in 1995. Of this sum, almost $210 million was in gross premium taxes paid into the general fund. Almost all of the gross premium taxes were paid by life, health, property and casualty, and title insurers.

Virginia's 2.25 percent gross premium tax rate on life insurance policies is higher than both the average (2.076 percent) and the median (2 percent) rates changed in the 48 states with such a tax. Among the 49 states with a premium tax on property and casualty insurance, Virginia's 2.25 percent rate is higher than the median (2.1 percent) but lower than the average (2.305 percent). A comparison among states based only on gross premium tax rates is inconclusive because it overlooks many other taxes and fees assessed by states, such as corporate income and franchise taxes, local taxes, and special assessments (such as the fire programs assessment). Such a comparison also overlooks differences in the effective rate of taxation caused by tax credits and variances in the tax base.

The correlation between a state's premium tax rate and its insurance industry employment is not clear. California, with the greatest number of insurance-industry employees, has gross premium tax rates that exceed the national average, while Wyoming, with the lowest tax rates, has the fewest insurance industry employees. However, those states with the largest ratios of insurance employees to their total population tend to have gross premium tax rates that are lower than the national average. Virginia, which ranks twelfth among all states in population, ranks 18th in combined property and casualty and life and health insurance employment.

Using hypothetical property and casualty and life and health companies, Virginia's taxes and fees were compared to those in seven other states. Among these states, Virginia's total tax and fee burden appears to be high. As a consequence, the same hypothetical company based in Virginia would pay substantial amounts of retaliatory taxes to other states.

The select committee examined several options for reducing the taxes and fees paid by Virginia insurers, including (i) granting a credit for retaliatory taxes paid to other states, (ii) lowering the gross premium tax rate, (iii) providing a credit for the fire programs fund assessment and other special fund taxes, (iv) providing for reciprocal nonretaliation with other states, and (v) reducing the period over which guaranty fund assessments may be taken as a credit against premium tax liabilities.

The select committee recommended that the General Assembly eliminate the flood prevention and protection fund assessment. Companies licensed to write flood insurance policies are required to pay a one percent assessment on flood insurance premiums, excluding premiums from policies written pursuant to the National Flood Insurance Act, with a $100 minimum assessment. In practice, almost all insurers pay the $100 minimum fee because policies are written under the federal act. In fiscal year 1995, $139,185 was collected from this assessment. The costs of complying with and administering this assessment are believed to exceed the benefit produced. An appropriation of general funds was viewed as a better method to fund this program.