The lasting effects of the pandemic continued to impact state tax in 2023, as many states followed the trend over the past several years of enacting tax cuts. This 2023 legislative activity resulted in reductions in individual or corporate income taxes in 17 states effective in 2024. The cumulative effect over the past three years is that basically every state has made a reduction in at least one significant tax regime, such as income, property, and/or sales tax.
These widespread tax reductions are a result of the robust federal COVID relief and state efforts to counter inflation and encourage expansion of business operations and employees. While further tax cuts may occur in 2024, the pace of change will be slower during the 2024 legislative sessions as federal stimulus dollars disappear and inflation begins to recede. State budgets are anticipated to reflect stable revenue positions, despite minor dips in revenue. However, the reductions passed to date will have negative impacts on state budgets, with the National Association of State Budget Officers’ 2022 State Expenditure Report reflecting a cost of $124 billion through 2028 for the tax cuts passed just through 2022.1 These impacts will correspondingly affect state services, such as higher education, and ultimately may have states seeking new revenue streams or reversing tax cuts.
Similar to the past several years, 2023 held few high-impact state tax developments for the insurance industry. As no state has significantly altered its premium tax regime over the past several years, the insurance industry has not truly benefited from any state-level pandemic tax relief. What has been—and remains—a major issue for the industry is dealing with remote workforces. The type of work involved in the insurance industry generally aligns well with remote employees, and most insurance groups have permanently transitioned to some form of remote or hybrid work schedule. As pointed out in our article, “Nomads Can Make You Go Mad – Tax Insights for Remote Workers (Volume 2),” remote work environments can potentially expose business entities and employees to many complex state and local tax (SALT) matters such as nexus exposure, payroll withholding issues, employee-based incentives, and individual income tax filing requirements.
Below are the most significant state tax developments from 2023 that may impact insurers:
- Myers v. California State Board of Equalization, Court of Appeal of California, Second District, No. B307981, April 24, 2023, upheld the standard for deciding whether certain healthcare service plans were insurers for gross premium tax purposes. Specifically, the existing test to determine if healthcare service plans are treated as standard insurers in the state (and subject to premium tax) or if they are to be regulated by the Department of Managed Health Care remains a test that requires balancing the indemnity aspects of the business against the direct service aspects and determining whether indemnity constitutes a significant financial proportion of the business.
- Colorado House Bill (HB) 1288 (effective May 16, 2023) establishes a Fair Access to Insurance Requirements (FAIR) plan to offer property insurance coverage not otherwise available in the market. The plan will be funded by a market share assessment imposed on member insurers, which they may in turn recoup from their policyholders.
- Delaware HB 146 (effective June 29, 2023) increases the Insurance Fraud Prevention Bureau assessment from the Department of Insurance to $1,050 per year (previously $900 per year).
- Iowa Senate Bill (SB) 549 (effective June 1, 2023) reduces the premium tax rate to 0.975% for tax year 2024; 0.95% for tax year 2025; 0.925% for tax year 2026. and 0.9% for tax year 2027 and future years.
- Kansas HB 2090 and SB 25 (effective January 1, 2024) decrease the surplus lines tax rate from 6% down to 3%.
- Louisiana HB 511 (effective June 28, 2023) increases the maximum assessment payable to the Louisiana Insurance Guaranty Fund to 2% of DWP (formerly 1%) and revises the amount of premium tax credit to 50% of the maximum assessment.
- Louisiana Health Service & Indemnity Co. D/B/A Blue Cross/Blue Shield of Louisiana v. Robinson, La. Ct. App., 5th Cir., Dkt. No. 2023 CA 0052, June 2, 2023, upheld a decision that an insurance company was not permitted to claim the investment tax credit against both the premium tax and the state corporate income tax.
- Nationwide Agribusiness Insurance Company et al v. Michigan Department of Treasury, Michigan Tax Tribunal, No. 21-000039, January 23, 2023, held that Nationwide’s affiliated group of companies was precluded by statute from filing combined returns for Michigan premium and retaliatory taxes and, as such, could not share credits between group members.
- Minnesota SB 2909 (effective August 1, 2023) increases the surcharge imposed on Minnesota homeowner’s insurance, commercial fire, and commercial nonliability insurance policy premiums to fund firefighter training from 0.5% to 0.65%.
- J. State Firemen’s Ass’n v. N.J. Division of Taxation, N.J. Tax Ct., Docket 000151-2019, January 30, 2023, held that the Department of Taxation was improperly using the 12.5% cap on taxable premium to compute the offset/refund due to foreign insurers for the fire tax credit against the premium tax.
- New Mexico SB 147 (effective July 1, 2023) clarifies that filing an amended return (including premium tax) for a lower liability than listed on the original return constitutes filing a refund claim.
- New York Assembly Bill 3009 and SB 4009 (effective May 3, 2023) contain a variety of tax provisions included in the 2023–24 budget package. Specifically, the current 0.1875% capital base tax rate also is extended for three years, through tax year 2026 for Article 9-A taxpayers. This tax can have significant tax ramifications for insurers with C corporation parents that are subject to or included in a New York franchise tax return.
- North Carolina Farm Bureau Insurance Company, Inc. v. NCDOR, No. 20 CVS 10244 (Wake County), April 3, 2023, ruled in favor of the taxpayer, reversing Judge Stacey Bawtinhimer’s administrative hearing from August 17, 2020. This restores the renewable energy property credits purchased through partnership investments that the Department of Revenue had disallowed. Note that the Department of Revenue has appealed to the North Carolina Supreme Court.
- Envolve Pharmacy Solutions, Inc. v. Wash. Dept. Rev., Wash. Ct. App., Dkt. No. 83563-7-I, February 27, 2023, affirmed the decision of the superior court holding that the taxpayer’s activities were functionally related to insurance business on which a premiums tax had been paid, and thus exempt from business and occupations (B&O) tax. Note that the Department of Revenue has been seeking to limit the applicability of the B&O insurance exemption to just taxpayers directly subject to the premium tax. The Department of Revenue has filed an appeal in the Washington Supreme Court.
To learn more about these and other developments for 2023, along with how they could affect your organization, or for assistance with any of these new provisions, please reach out to a professional at FORVIS.
- 1 “2023 State Expenditure Report,” nasbo.org.