Premium Tax Reduction Creates Substantial Economic Activity

Donald J. Pfundstein
Published on : 2006-05-25

Reducing the insurance premium tax will 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 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 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 retaliatory taxes are paid to states other then New Hampshire. Our high tax rate is burdening a dynamic industry with unreasonable levels of taxation resulting in payments being made to other states.

The E&Y 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 my 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.

The E&Y 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.

Had the state not reduced 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 would likely continue to lose insurance companies to other states.

In his letter dated February 28, 2006 to Representative Benjamin E. Parker, who chaired the House subcommittee on HB 678, Insurance Commissioner Sevigny reported on both the advantages of passing HB 678 and the consequences of failing to do so.

“Although there are no guarantees, I can tell you that I have spoken to senior management at Acadia Insurance Company who are seriously considering a redomestication to New Hampshire if HB 678 passes. And, I have also spoken to senior management at Peerless Insurance Company, a current New Hampshire domestic, who are seriously considering redomestication elsewhere failing passage of HB 678.”

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.

*Donald J. Pfundstein is admitted in New Hampshire.