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 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:

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  • The financial exposure resulting from the subsequent correction of errors that were originally made in their favor.

Problems for the insurance companies include:

  • The difficulty in identifying the proper taxing jurisdiction for properties and other risks,
  • The difficulty in quoting the correct premium including the tax to the consumer,
  • The administrative costs to insurance companies from filing thousands of forms and preparing thousands of checks for local governments, and
  • The exposure to 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.

In response to these and other problems, IIK was an integral part of an effort to reform the administration of local government insurance premium taxes.  Those efforts resulted in the passage in the 2008 session of the Kentucky General Assembly of HB 524 sponsored by Rep. Steve Riggs (D-Louisville).  HB 524 included provisions that:

  • Established orderly administrative procedures for refunds and assessments between insurers and local governments and requests for and payment of refunds to policyholders.
  • Required insurers starting in 2010 to use risk location technology verified for accuracy by the Kentucky Office of Insurance.  The goal of this provision was to make it more likely that insurers will properly collect the tax and make timely payments of taxes due to local governments.
  • Required insurers to pay fees to fund the Kentucky Office of Insurance expenses for the program.
  • Required insurers to give policyholders notice about the premium tax.
  • Protected local governments and insurers from premature litigation by requiring that administrative processes must be completed before litigation can be filed.
  • Shortened the statute of limitations starting in 2009 from five years to two years for additional assessments by local governments, amended returns by insurance companies, and requests for refunds from policyholders.   
  • Established a Local Premium Tax Advisory Council made up of representatives of local governments and insurers. 

IIK supported these changes and is working with insurers, local governments, and the Kentucky Department of Insurance to help implement the bill’s provisions.  The Executive Director of IIK was appointed to a seat on the Premium Tax Advisory Council created by the legislation, so IIK will remain involved in this issue for some time to come.

IIK still advocates other reforms that were not yet addressed by this legislation.  Among measures that we would support are more uniformity among local ordinances, and centralized collection and distribution of the taxes by an entity acceptable to insurers and local governments.

In advocating for more uniform ordinances and centralized administration, we do not advocate uniform rates for all local governments.  The local government insurance premium tax is a integral part of local government revenues, and we do not advocate any solution that would harm the funding of local governments.  We would simply like to see improvements in the administration of this tax.

In June, 2008 IIK released a study titled Kentucky Local Government Insurance Premium Taxation: Opportunities for Reform prepared by Dr. David E. Wildasin of the Martin School of Public Policy and Administration of the University of Kentucky.  IIK commissioned Dr. Wildasin, a nationally renowned scholar in the field of taxation and government finances, to undertake this study to determine whether and how local government insurance premium taxes might be administered more efficiently and effectively.  Among the conclusions that Dr. Wildasin drew were:

  • The collection and administration of local insurance premium taxes in Kentucky present significant and costly compliance challenges for insurers, as well as administration and enforcement burdens for local governments.
  • The advent of new information technologies presents an opportunity to improve significantly the collection and administration of insurance premium taxes.
  • A modernized administrative apparatus would lower the costs of tax compliance, reduce error rates, and the frequency and costs of disputes.
  • An improved administrative system would also enhance competition in the insurance industry, benefiting insurance consumers throughout the state and would enhance local financial management and revenue stability and predictability.

Based on this study as well as on years of experience with this tax, IIK believes that further improvements in the administration of these taxes would benefit taxpayers, local governments, and insurance companies and their customers. We are hoping to see legislation drafted and passed in the 2010 legislative session that would carry on with the reforms that were begun in 2008.

 

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