This paper attributes an association between insurers’ premium-to-loss ratios and state taxes to the allocation of premiums and losses by multistate insurers. Insurers likely find this form of income shifting efficient because it is largely unimpeded by stringent state guidelines or enforcement. To our knowledge, this study is the first to document income shifting using firm-level data, collected from the publicly-available accounting reports used to compute tax bases and filed with multiple governments. Although documentation of income shifting is not unique, the quality of the data and the ability to specify how income shifting is accomplished distinguish this paper from prior income shifting studies.

The paper also contributes to our understanding of the insurance industry by showing that state tax planning extends beyond the initial expansion decision (Petroni and Shackelford 1995) to include management of the annual regulatory reports. The findings raise questions about the reliability of the industry’s statutory reports. This demonstration of tax manipulation should be of particular interest to regulators, who rely on the annual statements to establish rates and assess solvency, rating agencies that rely on the accounting reports to assess solvency, and analysts, who rely on the accounting reports to differentiate among products. payday loans no credit checks

Finally, by including implicit taxes in its estimates of income shifting, this paper is the first, to our knowledge, to consider jointly the negative price-tax relation induced by tax-motivated income shifting and the positive price-tax relation induced by the formation of implicit taxes. Prior income shifting studies have ignored implicit taxes, potentially understating tax manipulation.

More explicit recognition of the countervailing forces of income shifting and implicit taxes is needed to advance our understanding of both effects. Although employing similar tests, the two lines advance opposite predictions of the price-tax relation. The critical distinction appears to be an ex ante assessment of the quality of the price data. Income shifting studies examine self-reported data (from financial statements or statutory reports) that are subject to manipulation. Tax shifting studies use independent price measures that are not easily managed, e.g., Shackelford (1991) uses bank loans and Guenther (1994) uses Treasury bills. Future research should consider more formal theoretical underpinning for the predicted price-tax relation.