Gross Premium Tax Insurance Surcharge

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					                                                              GROSS PREMIUM TAX
                                                              INSURANCE SURCHARGE
                                                              Repeal 0.5% Tax on Fire Insurance
                                                              Enact Insurance Surcharge
April 20, 2006
                                                                                          Yes       No
                                                                 DOR Administrative
                                                                 Costs/Savings              X

Department of Revenue
Analysis of H.F. 2953 (Smith), 1st Engrossment, Art. 4, Sec. 18, 19, 54, As Amended (H2953A64)

                                                                  Fund Impact
                                              F.Y. 2006      F.Y. 2007    F.Y. 2008        F.Y. 2009
                                                                     (000’s)
General Fund                                          $0            $0       ($3,300)        ($5,100)

Fire Safety Account                                   $0              $0         $8,500         $13,300

Effective for policies written or renewed on or after July 1, 2007.

EXPLANATION OF THE BILL

Current Law: Besides the general 2% gross premium tax, fire insurance premiums are subject
to an additional 0.5% gross premium tax. The tax base is split evenly between individuals and
businesses.

Proposed Law: The additional 0.5% gross premium tax on fire insurance is repealed.
However, mutual insurance companies subject to the general 1% and 1.26% gross premium tax
can elect to continue to pay a surcharge that is the lesser of the 0.5% gross premium tax on fire
premiums or the surcharge proposed by the bill. Under the bill, the tax base is split 70% / 30%
between individuals and businesses.

Under the bill (except as noted above), a 0.75% surcharge would be levied on premiums from
homeowner policies, commercial fire policies, and commercial non-liability policies. The
proceeds from the surcharge are dedicated to a fire safety account. The tax base for the surcharge
differs from the tax base used to compute the current law 0.5% tax on fire premiums.

When compared to the tax base under current law, the surcharge tax base for individuals is
approximately two times as large. Under current law, the tax base for individuals extends to a
portion of premiums beyond homeowner multi-peril policies such as the fire peril portion of auto
insurance. Under the bill, the tax base for individuals includes only homeowner multi-peril
policies. The entire value of these policies would be subject to the surcharge. Under current law,
1/3 of premiums for homeowner multi-peril policies are subject to fire premium tax because that
is the portion deemed to cover fire peril.
Department of Revenue                                                                April 20, 2006
Analysis of H.F. 2953, 1st Engrossment, As Amended
Page 2

EXPLANATION OF THE BILL (Continued)

As amended, the tax base is broader than in the previous version so that the tax base for
businesses under current law is approximately the same as the tax base for the surcharge. Under
current law, the tax base for business extends to a portion of premiums beyond commercial fire
and commercial non-liability multi-peril policies such as the fire peril portion of auto insurance,
allied lines and commercial liability multi-peril.

Under the bill, the tax base for business includes only commercial fire and, as amended,
commercial non-liability policies. Commercial non-liability policies are assumed to be
commercial multi-peril non-liability policies. Under the bill, 100% of commercial multi-peril
non-liability premiums would be subject to the surcharge. Under current law, 55% of
commercial multi-peril non-liability premiums is subject to the fire premium tax.

The bill defines the tax base for business as commercial policies. Since there is no definition of
the term commercial, its application remains unclear. Because its application remains unclear,
farm owner insurance was excluded from tax base subject to the surcharge because it is neither
commercial nor homeowner insurance.

REVENUE ANALYSIS DETAIL

0.5% Gross Premium Tax on Fire Premiums
• Tax year 2004 data from returns filed in 2005 was used to make the estimate. The reduction
   in tax was calculated on a per-firm basis.
• The revenue loss associated with tax year 2004 is projected to grow by the projected rate of
   growth in insurance premium tax collections that was published in the February 2006
   Department of Finance forecast.
• The effect of retaliatory taxation was computed using the tax rates in effect during calendar
   year 2004. Retaliatory taxation reduces the revenue loss from this bill about $0.4 million per
   year. This analysis assumes that other states will keep their tax rates at the same level as
   under current law. If tax rates in retaliatory states were reduced to match the repeal of 0.5%
   tax, the revenue loss from this bill would increase by about $0.4 million per year.
• Revenue losses from calendar year 2007 policies are reduced 50% to account for the
   effective date of policies written or renewed after July 1, 2007.

0.75% Surcharge on Selected Homeowner and Commercial Policies
• Tax year 2004 data from returns filed in 2005 was used to make the estimate. The surcharge
   was calculated on a per-firm basis.
• The revenue loss associated with tax year 2004 is projected to grow by the projected rate of
   growth in insurance premium tax collections that was published in the February 2006
   Department of Finance forecast.
Department of Revenue                                                            April 20, 2006
Analysis of H.F. 2953, 1st Engrossment, As Amended
Page 3
REVENUE ANALYSIS DETAIL (continued)

•   Most companies subject to the 1% and 1.26% gross premium tax would elect to pay a 0.5%
    gross premium tax on fire premiums instead of the surcharge.
•   Farm owners policies are not subject to the surcharge because these polices are not assumed
    to be commercial insurance policies
•   Revenue gains from calendar year 2007 policies are reduced 50% to account for the effective
    date of policies written or renewed after July 1, 2007.

Number of Taxpayers: 421 taxpayers pay the fire premiums tax per year. About 170 taxpayers
would pay no surcharge under the bill, because they lack premiums from homeowner policies or
commercial polices subject to the surcharge. The 250 other taxpayers would pay more tax than
under current law.

For the most part, companies subject to the 1% or 1.26% tax would pay the same tax as under
current law. However, some of these companies would pay less tax than current law.




                                    Source: Minnesota Department of Revenue
                                            Tax Research Division
                                            http://www.taxes.state.mn.us/taxes/legal_policy
hf2953-2/dkd

				
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