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FOR FURTHER INFORMATION ABOUT THIS REPORT, CONTACT THE OFFICE OF THE STATE AUDITOR
303.869.2800 - WWW.COLORADO.GOV/AUDITOR
INSURANCE PREMIUM TAX
EXPENDITURES
EVALUATION SUMMARY
JA
NUARY 2019
2019-TE3
THESE EVALUATIONS WILL BE INCLUDED IN COMPILATION REPORT SEPTEMBER 2019
I
NSURANCE
PREMIUM
INCOME TAX
E
XEMPTION
R
EINSURANCE
DEDUCTION
R
ETURN
PREMIUM
DEDUCTION
E
ARLY
TERMINATION
DEDUCTION
Y
EAR ENACTED
1883
1913
1913
1973
R
EPEAL
/E
XPIRATION DATE
None
None
None
None
R
EVENUE IMPACT
$83.6 million
Could not
determine
Could not
determine
Could not
determine
N
UMBER OF
T
AXPAYERS
1,459
Could not
determine
Could not
determine
Could not
determine
A
VERAGE TAXPAYER BENEFIT
$57,000
Could not
determine
Could not
determine
Could not
determine
I
S IT MEETING ITS PURPOSE
?
Yes
Yes
Yes
Yes
WHAT DO THESE TAX
EXPENDITURES DO?
The Insurance Premium Tax Expenditures
essentially define insurers’ state tax base.
The Insurance Premium Income Tax
Exemption requires insurance companies to
pay a premium tax on the gross amount of
revenue they receive from policies or
contracts on risks or obligations located in
Colorado, rather than paying an income
tax. The Reinsurance Deduction allows
insurers to deduct from their premium tax
base any reinsurance premiums they receive
for assuming another insurer’s in-state risks.
The Early Termination and Return Premium
Deductions allow certain insurers to deduct
from their premium tax base any dividends
and refunds that they make to policyholders.
WHAT ARE THE PURPOSES OF
THESE TAX EXPENDITURES?
Statute does not directly state a purpose
for these expenditures. We inferred that
the Return
Termination Deductions is t
insurers from being taxed on payments
they return to policyholders.
WHAT DID THE EVALUATION
FIND?
their purpose
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WHAT POLICY CONSIDERATIONS
DID THE EVALUATION IDENTIFY?
The General Assembly may want to
consider allowing insurers to deduct any
licenses, fees, or taxes they pay to local
governments
for the purpose of
determining their premium tax liability.
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TAX EXPENDITURES REPORT
INSURANCE PREMIUM
TAX EXPENDITURES
EVALUATION RESULTS
WHAT ARE THE TAX EXPENDITURES?
In 1883, Colorado began levying a tax on premiums collected in-state
by insurance companies for policies that they issued covering property
or risks in the state [Section 10-3-209, C.R.S.]. The same bill that
created the premium tax also included the Insurance Premium Income
Tax Exemption, which exempts insurance companies from paying state
income tax [Section 39-22-112(1), C.R.S.]. Without this exemption,
insurance companies would have been subject to both an income tax
and a premium tax on the premiums they collect. Statutes around the
premium tax requirement and the exemption have changed periodically
throughout the years, but remain substantially the same since first
enacted. The premium tax rate is generally 2.0 percent of gross
premiums. The amount of premium tax revenue collected in Colorado
has grown over the years, and was about $270.9 million for Calendar
Year 2017, as shown in EXHIBIT 1.1.
EXHIBIT 1.1.
INSURANCE PREMIUM TAX REVENUE
CALENDAR YEARS 2005–2017 WITH TRENDLINE
SOURCE: Division of Insurance.
$0.00
$50,000,000.00
$100,000,000.00
$150,000,000.00
$200,000,000.00
$250,000,000.00
$300,000,000.00
2005 2009 2013 2017
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INSURANCE PREMIUM TAX EXPENDITURES
Subsequent to the initial bill implementing the premium tax and the
Insurance Premium Income Tax Exemption, statute was amended to
establish the following three tax expenditures that can be deducted from
an insurance company’s premium tax base (amount that the premium tax
is calculated on), and thus, reduce the amount of premium tax owed:
REINSURANCE DEDUCTION—This provision was originally added in
1913 and then amended in 1953, to allow insurers to deduct from
their premium tax base the amount that they receive as reinsurance
premiums for business in the state. Reinsurance is when one
insurance company takes on part or all of the risk for a policy that
has been issued by another insurance company in consideration for
a premium payment. That is, the insurance company that originally
issued a policy itself purchases insurance to help cover any losses
incurred from the first policy.
RETURN PREMIUM DEDUCTION—This provision was also originally
added in 1913 and then amended in 1955, to allow insurance
companies, other than those providing life insurance, to deduct from
their premium tax base any “return premiums,” which includes any
amounts returned or credited to policyholders due to dividends
issued, early cancellation of their policies, overpayments, errors,
audits, or reductions in coverage.
EARLY TERMINATION DEDUCTION—This provision was added in
1973 to allow insurers to deduct from their premium tax base any
credit life, credit accident, or health insurance premiums they refund
due to policyholders terminating their policies prior to their maturity
dates. Credit insurance policies are occasionally taken out by debtors
in conjunction with their credit cards, auto loans, and mortgages to
ensure that their debt is paid off in case they die (in the case of credit
life) or become ill or injured and, consequently unable to work (in
the case of credit accident).
Insurance companies pay premium taxes quarterly or annually to the
Division of Insurance within the Department of Regulatory Agencies.
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TAX EXPENDITURES REPORT
Insurance companies do not formally claim the Insurance Premium
Income Tax Exemption, or the three deductions. Instead, they are
required to report how much reinsurance they assumed or transferred
to other insurers on a national, but not state-specific, basis on their
Underwriting and Investment Exhibit, which is a standardized form
developed by the National Association of Insurance Commissioners
(NAIC) and submitted to state insurance regulators. In addition,
insurers are required to report the amount of dividends paid to
policyholders, and for non-life/health insurers, the amount they
refunded to policyholders due to return premiums and early
terminations. The insurers net these amounts from their gross premium
revenue and the resulting amount is the tax base on which most states,
including Colorado, levy insurance premium tax.
WHO ARE THE INTENDED BENEFICIARIES OF THE TAX
EXPENDITURES?
The intended beneficiaries of these tax expenditures are insurance and
reinsurance companies doing business in Colorado. These include
property and casualty insurers (that provide auto insurance,
homeowner’s insurance, bail bonds, and other types of insurance), life
and health insurers, title insurers, reinsurance-only firms, and other
types of insurers.
There are several types of organizations that are not impacted by the
premium tax or these expenditures. Specifically, organizations that
operate as third-party administrators to most private-sector employee
benefit plans, which fall under the federal Employee Retirement Income
Security Act of 1974 (ERISA), are not typically subject to state
regulation or insurance premium taxes. In addition, federal law exempts
Medicare, Medicaid, and the health insurance premiums of federal
employees, including military service members, from state taxation, as
well as other federal insurance programs. Finally, other organizations
commonly thought of as “insurers” are also not subject to state
premium taxes and thus are not beneficiaries of these expenditures, such
as managed care organizations (including “HMOs” and prepaid dental
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INSURANCE PREMIUM TAX EXPENDITURES
care plans); public entity self-insurance pools; pre-need funeral sellers;
and Pinnacol Assurance, a political subdivision of the State and the
workers’ compensation insurer of last resort.
As of June 2018, there were 1,481 insurers in Colorado that provided
insurance or insurance-like products that were subject to the premium
tax requirements. Colorado insurers collected about $27.1 billion in
premiums and paid about $270.9 million in premium taxes during
Calendar Year 2017.
WHAT IS THE PURPOSE OF THE TAX EXPENDITURES?
Statute does not directly state a purpose for any of these tax
expenditures. Based on our review of legislative history, other states’
tax expenditure evaluations, and general tax policy research, we
inferred the following purposes:
THE INSURANCE PREMIUM INCOME TAX EXEMPTION WAS CREATED TO
AVOID DOUBLE TAXING INSURERS
. The unique nature of the insurance
industry makes taxing insurers on their income difficult to do in a fair
manner. Insurers need to keep reserves in order to pay off future claims
and benefits, but the timing and amount of these future payments is
often unknown, which means the size of their reserves must vary over
time. Consequently, it is difficult to compute the taxable income of
insurers while allowing for needed reserves. A tax on insurers’
premiums instead is relatively uncomplicated to compute, collect, and
administer, and has the added benefit of providing a stable source of
revenue for the State compared to the income tax. Most insurers are
incorporated as C corporations, and thus, the biggest effect of this
exemption is to substitute insurers’ state corporate income tax liability
with their premium tax liability. Insurers are still required to pay federal
income tax.
THE REINSURANCE DEDUCTION WAS ALSO CREATED TO PREVENT DOUBLE
TAXING PREMIUMS
. Insurance companies reinsure each other’s policies
or turn to specialized reinsurers to spread out risks, reduce concentrated
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TAX EXPENDITURES REPORT
exposures, and limit the total losses that might be incurred by the
original insurer, particularly for riskier policies. This allows insurers to
offer more competitive rates to policyholders. Because the premiums on
the original policy that is the basis for the reinsurance premiums, was
likely already taxed, either by Colorado or another taxing jurisdiction
(since most of these reinsurance transactions occur between insurers
located in different states or countries), taxing the reinsurance premium
would effectively result in a double tax.
THE RETURN PREMIUM AND EARLY TERMINATION DEDUCTIONS WERE
CREATED TO PREVENT INSURERS FROM BEING TAXED ON PAYMENTS THAT
ARE RETURNED TO POLICYHOLDERS
. These two deductions typically deal
with money that insurers initially receive from policyholders, but later
return to them in the form of refunds, credits on future payments, or
dividends. The insurance companies net out these amounts from their
gross premiums since they did not keep them before calculating the tax
owed.
ARE THE TAX EXPENDITURES MEETING THEIR PURPOSE
AND WHAT PERFORMANCE MEASURES WERE USED TO
MAKE THIS DETERMINATION?
We determined that the tax expenditures are meeting their purposes
because they prevent insurance and reinsurance premiums from being
double-taxed, and they prevent insurers from paying taxes on payments
that are returned to policyholders. Statute does not provide quantifiable
performance measures for these expenditures. Therefore, we created and
applied the following performance measures to determine the extent to
which the expenditures are meeting their purposes:
PERFORMANCE MEASURE #1: To what extent do the Insurance Premium
Income Tax Exemption and Reinsurance Deduction prevent insurers
from being double-taxed on premiums?
RESULT: We found evidence to suggest that insurance companies are
paying premium taxes, but are applying the Insurance Premium Income
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INSURANCE PREMIUM TAX EXPENDITURES
Tax Exemption to not pay state income tax, and are using the
Reinsurance Deduction to avoid double taxation on premiums. As of
January 2019, according to the Division of Insurance, 1,459 of the
1,481 insurance companies in Colorado required to file for premium
taxes in Calendar Year 2017, had submitted the required forms and
paid the premium tax amount owed. However, we lacked data to
determine if any of these insurers also paid Colorado income tax on
their insurance income or did not deduct reinsurance premiums from
their taxable premium amount. Stakeholders that we spoke with
indicated that insurers are very much aware of and apply the exemption
and deduction when calculating their tax liabilities. This would indicate
that insurers are not paying state income tax on the premiums collected
or paying a premium tax on reinsurance premiums.
PERFORMANCE MEASURE #2: To what extent do the Early Termination
and Return Premium Deductions prevent insurance companies from
being taxed on payments that they return to policyholders?
RESULT: We found that the Early Termination and Return Premium
Deductions are likely helping to prevent insurers from being taxed on
the premiums that they returned to policyholders. The refunds, credits,
or dividends covered by these deductions encompass most of the
payments that insurers receive, but sometimes later return to
policyholders. For example, non-life insurers generally record an
“unearned premium liability” when they receive a premium payment
from a policyholder, which corresponds to the amount of the premium
that they have not yet had the time to “earn,” and that decreases with
time. Insurers will refund this unearned portion to the policyholder if
the policy is canceled prior to its end date, at which point the amount
returned becomes deductible to the premium tax base under the Early
Termination or Return Premium Deduction. We lacked data to
determine the extent to which insurance companies are applying these
deductions. However, based on our review of Division of Insurance tax
forms and interviews with stakeholders, it appears that insurers are
aware of and apply the deductions.
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TAX EXPENDITURES REPORT
WHAT ARE THE ECONOMIC COSTS AND BENEFITS OF THE
TAX EXPENDITURES?
We estimate that about $83.6 million in state revenue was forgone in
Calendar Year 2017 as a result of the state income taxes that insurers
did not pay due to the Insurance Premium Income Tax Exemption.
Because Division of Insurance data was not available to measure the
state revenue impact of this expenditure, we used NAIC data on the
national net income of insurers subject to Colorado premium taxes to
develop our estimate. We then apportioned a segment of their net
income after expenses to their Colorado operations by using the overall
ratio of premiums written in Colorado to total premiums written
nationwide, which we subsequently multiplied by the statutory tax rate
for Colorado corporations, which is 4.63 percent. It is important to note
that this estimate is less reliable because we did not have data on the
actual federal taxable income of the insurers, which differs from the
income that they report on their annual statements to the NAIC and
state insurance regulators. We also did not take into account any
credits, deductions, or exemptions insurers might have claimed if they
were taxed as corporations.
Because the Insurance Premium Income Tax Exemption was designed
to work in conjunction with the policy decision to use an insurance
premium tax, we also estimated the revenue impact of the State’s policy
of taxing insurers on their premiums as opposed to their income. In Tax
Year 2017, the State collected about $270.9 million in insurance
premium taxes. Therefore, based on our estimate of $83.6 million in
potential corporate income taxes above, if the State instituted an income
tax on insurers to replace the insurance premium tax, the State would
have collected about $187.3 million less from insurers in Calendar Year
2017.
We were not able to estimate the revenue impact of the Reinsurance,
Early Termination, or Return Premium Deductions due to a lack of
data. With the exception of life insurance companies, insurers are not
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INSURANCE PREMIUM TAX EXPENDITURES
required to report the amount deducted in their premium tax filings
with the Division of Insurance.
WHAT IMPACT WOULD ELIMINATING THE TAX
EXPENDITURES HAVE ON BENEFICIARIES?
Eliminating these insurance premium tax expenditures would result in
significantly higher taxes for insurers doing business in Colorado.
Specifically, without these expenditures, insurers would have to pay
state income tax on their revenue, in addition to the premium tax, and
the amount of premiums that the premium tax is based on would be
higher, resulting in a substantially higher amount of taxes due. For
example, based on our estimated $83.6 million state revenue impact of
the Insurance Premium Income Tax Exemption, which is equivalent to
the additional income tax insurers would have to pay without the
exemption, eliminating this expenditure alone would increase insurers’
state taxes by 31 percent (from about $270.9 million in Tax Year 2017
to $354.5 million). Insurers would likely respond to this additional tax
by increasing premiums charged in Colorado, resulting in a higher cost
of insurance in the state.
In addition, if Colorado no longer had these tax expenditures,
Colorado-domiciled insurers doing business in other states might also
have a higher tax burden in these other states. This is because 49 states
(including Colorado) and the District of Columbia have retaliatory
insurance provisions in their statutes that allow them to impose taxes,
fees, assessments, or other monetary requirements on out-of-state
insurers that would result in an effective tax rate that is equivalent to
the rate that their in-state insurers pay in other states. Since eliminating
these expenditures would increase the effective tax rate of most insurers
licensed in Colorado, it is possible that other states would respond by
raising taxes on Colorado-domiciled insurers doing business in their
states. All of the stakeholders we spoke with about these tax
expenditures said that they are very beneficial for Colorado’s insurance
sector.
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TAX EXPENDITURES REPORT
ARE THERE SIMILAR TAX EXPENDITURES IN OTHER STATES?
We found that all of the 49 states and the District of Columbia that levy
a tax on insurance premiums have at least two tax expenditures similar
to those available in Colorado. Oregon is the only state that does not
have a premium tax. EXHIBIT 1.2 shows that all 49 states and the District
of Columbia offer both a reinsurance deduction and a return premium
and/or early termination deduction and 39 states and the District of
Columbia offer the Insurance Premium Income Tax Exemption.
EXHIBIT 1.2.
JURISDICTIONS THAT OFFER INSURANCE PREMIUM TAX
EXPENDITURES SIMILAR TO COLORADO
EXPENDITURE
NUMBER OF
JURISDICTIONS
IDENTIFIED
Insurance Premium Income Tax Exemption
40
1
Reinsurance Deduction
49
Return Premium/Early Termination Deduction
49
2
SOURCE:
Bloomberg BNA, 2017 NAIC State Retaliation Guide.
1
Some
states limit the exemption to certain types of insurers or tax certain types of investment
income
.
2
Includes 13 states that do tax some or all dividends that insurers issue to policyholders.
There are 10 states that also levy an income tax on insurers, in addition
to a premium tax. However, all of these states either cap insurers’
income tax liability or allow them to credit their income tax paid against
their premium tax liability, which is always higher.
ARE THERE OTHER TAX EXPENDITURES OR PROGRAMS
WITH A SIMILAR PURPOSE AVAILABLE IN THE STATE?
We did not identify any other tax expenditures or programs with a
similar purpose in Colorado.
WHAT DATA CONSTRAINTS IMPACTED OUR ABILITY TO
EVALUATE THE TAX EXPENDITURES?
The Division of Insurance does not collect information on these
expenditures from most types of insurers in their premium tax filings.
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INSURANCE PREMIUM TAX EXPENDITURES
Specifically, insurers net out the value of their return premiums and
refunds due to early terminations when entering the amount of
premiums collected or contracted for on Division of Insurance tax
reporting forms. In addition, insurers only report the value of any
reinsurance transferred and assumed on a national basis. Therefore, we
lacked data on how much Colorado insurers are claiming for the Return
Premium and Early Termination Deductions. Similarly, insurers do not
have to report the value of their federal taxable income to the State since
they are not subject to state income taxes. If the General Assembly
would like a revenue impact estimate for these four expenditures, then
the Division of Insurance would need to add fields to its online premium
tax filing system to collect this data from insurers. However, this may
result in a higher administrative burden for insurers operating in
Colorado, and the Division of Insurance would incur additional costs
to make this administrative change.
WHAT POLICY CONSIDERATIONS DID THE EVALUATION
IDENTIFY?
THE GENERAL ASSEMBLY MAY WANT TO CONSIDER ALLOWING INSURERS
TO DEDUCT FROM THEIR PREMIUM TAX BASE THE AMOUNT OF ANY
LICENSES
, FEES, OR TAXES THEY PAY TO LOCAL GOVERNMENTS. A 1971
Colorado Supreme Court case ruled that the provisions of Section 10-
3-209(1)(c), C.R.S., which prohibit Colorado municipalities and
counties from levying a per-employee “occupational privilege tax”
(sometimes called a “head tax”) on insurers, was unconstitutional in
relation to home rule jurisdictions seeking to raise revenue. Five
Colorado home rule jurisdictions (Aurora, Denver, Glendale,
Greenwood Village, and Sheridan) currently levy an occupational
privilege tax each month on most businesses and employees, ranging
from a total monthly tax of $4 per employee in Aurora and Greenwood
Village to $10 in Glendale. Greenwood Village also requires businesses
that are liable for the tax to pay a one-time licensing fee of $10. The
General Assembly may want to consider allowing insurers to deduct
these local taxes and fees when determining their premium tax
liabilities, since they were not allowable at the time the expenditures
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TAX EXPENDITURES REPORT
were created. Five states offer a deduction or credit against some or all
of these local taxes, licenses, and fees, while six other states expressly
cap the amount of these obligations that local governments can impose
on insurers. Allowing for such a deduction may also have the added
effect of reducing any retaliatory taxes currently levied on Colorado-
domiciled insurers, since many state insurance regulators take into
account taxes levied by political subdivisions of other states in their own
calculations of retaliatory taxes.