August 25, 2008
Tax Foundation Urges Texas Court to Avoid Sparking an Interstate Tax War
Brief Opposes Punitive Tax on Out-of-State Insurance Companies
Washington, DC, August 18, 2008 - In a friend-of-the-court brief filed today with the Texas Supreme Court, the Tax Foundation is urging the reversal of a Comptroller's ruling imposing additional taxes on insurance companies from other states.
Joseph Henchman, tax counsel for the Tax Foundation, argues that allowing the Comptroller's ruling to stand will force other states to raise their tax rates on Texas insurance companies, setting off an interstate tax war and ultimately harming consumers.
"Failing to overturn the Comptroller's ruling will ultimately set off a chain reaction of tax increases on out-of-state insurance companies until no insurance companies do interstate business at all," explained Henchman. "These tax increases would ultimately be imposed on consumers paying higher prices, shareholders receiving lower dividends, and employees receiving reduced wages."
The First American Title Insurance Company v. Combs suit seeks a judicial order to reverse the Comptroller's decision to count only 15 percent of Texas's tax in figuring the calculation on out-of-state companies, with the Comptroller arguing that insurance companies only keep 15 percent of premiums (the remainder going to agents). Because no other state does this, Texas therefore pretends that its insurance taxes are much lower than they actually are, enabling it to impose huge retaliatory taxes. For instance, if another state imposes a 2.0% premium tax on Texas insurers, Texas would impose a 3.148% premium tax on that state's insurers.
On May 16, 2008, the Texas Supreme Court issued a 5-4 opinion upholding the Comptroller's ruling. The petitioners are now seeking a rehearing.
The Tax Foundation brief also notes that while insurance retaliatory taxes legitimately deter discriminatory taxes, the Comptroller's decision does not achieve the constitutional goal of retaliatory taxes, which is to equalize tax burdens and discourage discriminatory taxes.
"Since 1981, 25 of the 34 states that had discriminatory insurance taxes eliminated those taxes, in most cases by lowering rates," says Henchman. "As a result, insurance companies in much of the country now compete on market factors, no artificial tax distortions. The Comptroller's decision is designed to impose discriminatory taxes, and therefore increases those distortions."
The Tax Foundation brief, filed on August 18, 2008, further argues that the Comptroller's ruling was a policy reversal unaccompanied by legislative action, and therefore should not be given deference by the Court.
"Reversing the decision will help ensure stability and knowledge of the law and the proper limited role of administrative agencies," Henchman argued.
The brief, filed on August 18, 2008, can be found at http://www.taxfoundation.org/publications/show/23539.html.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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To set up an interview to discuss First American Title Insurance Company v. Combs and the brief submitted by the Tax Foundation, please contact Matt Moon, the Tax Foundation's Manager of Media Relations, at (202) 464-5102.