Local Government Insurance Premium Taxes (Municipal Premium Taxes)

Kentucky law permits local governments to impose taxes on premiums charged by insurance companies. While not all local governments assess these taxes, 342 municipalities and 30 counties do impose them. The collection of these taxes is administered entirely at the local level, although the Kentucky Office of Insurance (KOI) has the responsibility to monitor and oversee the compliance by insurance companies.

There are a number of difficulties in administering the current system from the perspective of both the local governments and the insurance companies.

Problems for the local governments include:

1. The potential loss of revenue when properties and other risks are not identified correctly within their jurisdiction and
2. The legal and financial exposure resulting from the subsequent correction of errors that were originally made in their favor.

Problems for the insurance companies include:

1. The difficulty in identifying the proper taxing jurisdiction for properties and other risks,
2. The difficulty in quoting the correct premium including the tax to the consumer,
3. The administrative costs to insurance companies from filing thousands of forms and preparing thousands of checks for local governments, and
4. The exposure to legal liability and administrative penalties for misidentifying property locations.

This system is unique to Kentucky. While other states allow local governmental entities to impose premium taxes, all other states collect and administer them on a centralized basis and all mitigate the location problem in several ways.

The present system's high compliance costs resulting from decentralized administration of the taxes must necessarily be passed on to policyholders. Therefore, from a public policy perspective, Kentucky's present system hurts all Kentucky citizens and businesses, and is a costly and inefficient way to raise tax revenue.

IIK is integrally involved in working with legislators, the KY Office of Insurance, and local governments in an attempt to reform the system of administering these taxes. The solution that we are advocating includes two main parts.

1. A KOI-sponsored or approved risk location system based on geo-spatial data with a safe harbor from penalties for insurance companies and agencies who rely upon it.
2. A centralized collection and distribution system administered by a state government agency.

IIK believes that this new system of collecting taxes would benefit taxpayers, local governments, and insurance companies and their customers. We are hoping to see legislation drafted and passed in the 2008 legislative session that would implement these changes.

Copyright © Insurance Institute of Kentucky | Site by NAMIC Web Services