ARIZONA STATE SENATE
Phoenix, Arizona
insurance premiums; tax
reductions
Purpose
Reduces the premium tax rate
imposed on insurance companies transacting business in this state from 2.0
percent to 1.7 percent of net premiums over two years.
Background
The insurance premium tax is
imposed on insurance companies doing business in Arizona, as an alternative to
the corporate income tax imposed on other types of corporations. The insurance
premium tax is a different type of taxing mechanism than the corporate income
tax in that the rate is applied against net insurance premiums in lieu of
taxable income (after deduction, additions, subtractions, etc.). The insurance
premium tax and corporate income tax are never both applicable for the same
business.
Like most states, Arizona
imposes a retaliatory tax on foreign insurers doing business in Arizona. And
like most states, the imposition of the retaliatory tax in Arizona means that
foreign insurers pay the greater of the Arizona insurance premium tax rate or
the rate imposed by the foreign insurer’s home state on Arizona insurers. S.B. 1115 reduces the premium tax rate from
2 percent to 1.7 percent over two years. The primary recipient of insurance
premium tax collections is the state general fund. Most insurance premium
taxpayers remit 15 percent installment payments in March, April, May, June,
July and August each year, and reconcile liability on a calendar year basis in
the following March. The installment payments are based on prior year
liability.
While the insurance premium
tax rate in Arizona is 2.0 percent of net premiums, this has not always been
the case. Prior to 1985, the general premium tax rate for insurers domiciled in
Arizona was 1.0 percent and the rate for foreign companies was 2.0 percent.
These two rates were melded into one by increasing the domestic insurance
premium tax rates within three years (Laws 1985, Chapter 360). As an
illustration, in FY 1999, the Department of Revenue collected about $545
million in corporate income taxes. In
FY 2000, the amount dropped to $523 million dollars. By comparison, according to the Department of Insurance, the
insurance premium tax raised about $150 million dollars in FY 1999 and about
$160 million in FY 2000. Industry experts argue that the tax reduction in S.B.
1115 is a matter of equity in the corporate tax rates and industry.
Currently, according to industry and government sources, insurance premium taxes contribute in excess of $160 million per year to the general fund. Based on the Department of Insurance’s historical data about the growth of insurance premiums in the state, S.B. 1115 may reduce the amount deposited into the general fund by about $3.4 million in FY 2002, and by $987,000 in FY 2003. In FY 2004, due to standard growth, the general fund ceases to lose money and begins to see net increases in receipts from the insurance premiums tax by about $5 million.
A fiscal note has been requested and is pending from the Joint Legislative Budget Committee.
Provisions
1. Changes the insurance premium tax rate to 1.7 percent over two years.
2. Reduces by 15 percent the premiums required from insurance companies that are required to pay an amount equal to 15 percent of the amount paid during the preceding calendar year for calendar years 2002 and 2003.
3. Provides for an effective date for the initial tax reduction beginning from and after December 31, 2001 and for the subsequent tax reduction beginning from and after December 31, 2002.
Prepared by Senate Staff
February 8, 2001