Gov. Malloy Announces Proposal to Support Local Insurance Industry, Keep Jobs in Connecticut
Governor Proposes Lowering Insurance Premium Rate from 1.75 to 1.5 Percent
(HARTFORD, CT) – Governor Dannel P. Malloy today announced that the state budget proposal he will release next week will include a reduction in the tax rate on insurance premiums – dropping from the current rate of 1.75 percent down to 1.5 percent. The Governor explained lowering this tax rate will continue the state’s efforts to improve the business climate for insurers located across Connecticut, which account for more than 58,000 jobs in the state.
“There are simple and relatively inexpensive ways we can improve the business climate by making state government more predictable and sustainable,” Governor Malloy said. “The insurance industry has a long and storied history in Connecticut, and we must ensure that we maintain our competitive edge so that they continue to thrive and grow in our state. Restructuring and lowering the premium tax will substantially improve market conditions for Connecticut-based insurance companies. This change will save them millions in taxes paid to other states across the country.”
A total of 49 states and Washington, D.C. have some form of the premium tax, with rates ranging from 0.5 percent to 4.35 percent. Insurers pay the higher of the two premium tax rates to the state where they are conducting business. By lowering the insurance premium tax rate to 1.5 percent in Connecticut, the liability for Connecticut-based insurers conducting business in states with lower tax rates will be significantly reduced. Under the Governor’s proposal, the costs of lowering the tax rate – $22 million – will be covered by limiting use of tax credits that companies may apply against premiums tax liability.
This proposal makes Connecticut a more competitive state for the insurance industry by moving to match the lower rates in some other states. However, if an out-of-state insurer is writing a policy in Connecticut and the insurer’s home state has a higher premium tax rate, then that insurer will continue to pay the higher premium tax rate to the State of Connecticut.
After adjusting for deductions and credits, the premium tax yielded Connecticut $233 million in FY16 and an anticipated $239 million in FY17. The Governor’s budget will anticipate a revenue reduction of approximately $11 million in Fiscal Year 2018 and $22 million in Fiscal Year 2019 to account for these proposed changes, which would be effective January 1, 2018.
Governor Malloy will present his full FY18-19 state budget proposal on February 8 during an address to a joint convention of the Connecticut General Assembly.
ADDITIONAL BACKGROUND AND INFORMATION:
Due to the range in premium taxes across the nation and to prevent a race to the bottom, states began implementing “retaliatory taxes” on insurance premiums. A retaliatory tax is applied to a nonresident or foreign-based insurer writing a premium in a jurisdiction where the insurer is authorized but not incorporated. The nonresident, or out-of-state, insurer must pay the greater of the tax liability that would be generated in the state in which they are writing the policy or the state in which the insurer is headquartered.
In short, under the retaliatory tax structure, an insurer will always pay the higher of the two premium tax rates. By lowering the insurance premium tax rate to 1.5 percent in Connecticut, the liability for Connecticut-based insurers conducting business in states with a lower tax rate will be significantly reduced.
For example, if a Connecticut-based insurer were writing a $1 million policy in Iowa, the insurer would have to pay a premium tax to the State of Iowa. The premium tax rate in Iowa is 1 percent, so, in theory, the premium tax owed would be $10,000. However, because Iowa has a retaliatory tax, the insurer must pay the higher tax rate of its home-state, which is currently 1.75 percent. Therefore, the Connecticut-based insurer would end up paying $17,500 in taxes to the State of Iowa. By lowering Connecticut’s premium tax rate to 1.5 percent, the hypothetical tax liability would only be $15,000. This would save the insurer $2,500 in state tax owed to Iowa—without affecting Connecticut’s bottom line at all.
The proposal announced today applies to in-state, out-of-state, and foreign companies as well as direct subscriber charges to health care centers. The insurance premium tax is levied on qualifying insurance premiums and health care subscription charges. Insurers licensed to do business in Connecticut currently pay at a rate of 1.75 percent of their annual net direct premiums for property or risk insured in Connecticut. Health care centers pay a tax of 1.75 percent of their annual direct net subscriber charges, excluding cancellations and other returned charges. This proposal would drop both the insurance premium tax rate and direct net subscriber charges to 1.5 percent.