INSURANCE

Insurance Premium Tax Cut Investment Creates Jobs - Support HB 678

January 2006

By Donald J. Pfundstein*

You may know that the cost of insurance includes a 2% tax on the premiums you pay. HB 678 which resulted from the work of a legislative study committee would decrease the tax from 2% to 1% for property and casualty and life insurers. HB 678 is one of the state's best vehicles to create jobs. The bill is currently being reviewed by the House Ways and Means Committee.

Reducing the insurance premium tax would provide substantial economic stimulus, create over 1,600 new jobs over the next several years and add over $61 million annually to personal incomes in New Hampshire. These conclusions were reached in a study conducted by Ernst & Young's Quantitative Economics and Statistics
Group which issued a report dated February 15, 2005 (The Josiah Bartlett Foundation predicts this change will create up to 3,400 jobs in an aggressive analysis of the Ernst & Young Study). The proposed reduction will make New Hampshire insurance companies more competitive nationwide. It will encourage new insurance company start ups. Additionally, New Hampshire will become a magnet for other insurance companies to relocate or "redomesticate" to New Hampshire.

How does all this work? New Hampshire 's domestic insurance companies currently pay a 2% premium tax for business written in New Hampshire and elsewhere, even if the other states in which they write business charge less than 2%. This is due to the retaliatory tax laws affecting insurance companies doing business across state lines. For example, Nebraska which has a 1% premium tax charges New Hampshire domestic insurance companies 2% for business written in Nebraska because New Hampshire charges Nebraska domestic insurance companies 2% for any business written in New Hampshire. Reduction of the insurance premium tax will reduce the retaliatory taxes paid by New Hampshire domestic insurance companies, increase their competitiveness and expand the number of insurance jobs in New Hampshire.

The study projects an increase of 750 insurance jobs, which in turn indirectly creates another 733 non-insurance jobs and an additional 163 New Hampshire jobs by reducing the cost of insurance to New Hampshire businesses. The proposed tax reduction is estimated to create over 1,600 new jobs! I have often asked in this column "What have you done lately to create jobs?" Supporting this tax reduction not only reduces your business' insurance expenses, but actually creates jobs and the significant economic activity associated with job creation. Jobs are created because domestic insurance companies will expand, other insurance operations will redomesticate to New Hampshire to take advantage of the lower premium tax, and the increased insurance employment will indirectly create other jobs.

The study reported that during 1998 - 2003, Ohio which lowered its premium tax rate from 2.5% to 1.4% had the most net redomestications into the state while California which has a premium tax of 2.35%, well above the national average, had the largest number of net redomestications out of the state.

If the state does not reduce the premium tax, it is not simply a matter of foregoing the creation of 1,600 new jobs and $61 million of additional personal income. We will likely continue to lose insurance companies to other states. Between 1999 and 2003, four companies moved out of New Hampshire. One went to Nebraska which has a 1% premium tax and two redomesticated to South Carolina which has a rate of 1.25%. The fourth simply moved across the border to Massachusetts. Doing nothing not only loses the benefits of increased jobs and related economic activity, but is likely to result in further redomestications out of the state with associated job losses.

The state's total investment to create over 1,600 jobs and the related economic benefits is projected by Ernst & Young to be $4.6 million in the form of a net reduction in revenue. When local government increases in revenue are factored in, the net state and local revenue loss, or true investment, is a mere $2.6 million. Should our state and local governments (you and your neighbors) invest $2.6 million in foregone revenue to produce 1,600 jobs and an additional $61 million in annual personal income? It seems like a pretty sound investment to me.

HB 678 will create jobs. It's a sound investment for New Hampshire 's economy. What have you done lately to create jobs? There is something you can do. Support HB 678.

You can download resource materials on the premium tax decrease here:

ptdresource.pdf (9MB PDF file)

A version of this article "Insurance Premium Tax Is A Wise Investment" was originally published during April 2005 by the New Hampshire Business Review.

*Donald J. Pfundstein is admitted in New Hampshire.

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