AN ANALYSIS OF PROPERTY-CASUALTY INSURERS: Tax Variables

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The ideal tax measure is the marginal tax rate each property-casualty insurer faces in each state. Unfortunately, the data do not permit such fine calibrations. Instead, we employ two alternative measures to approximate marginal tax rates: the effective (or average) state tax rate on insurers and the estimated statutory (premium and income) tax rates. To determine the relevant tax rate for each insurer-state, insurers’ unique retaliatory tax structure must be incorporated in the tax measures. Thus, the insurer-state tax rate is the greater of the tax rate in the state where the insurance is sold and the tax rate in the state where the insurer is incorporated.4 Negative coefficients on the tax measures are consistent with tax management of the annual statements.

The first tax measure is the effective tax rate in each state, i.e., the total taxes (premium and income) collected from all insurers within the state as a percentage of total premiums. ETR for an insurer-state is the greater of the effective tax rate in the state where the policy is written and the effective tax rate in the state where the insurer is incorporated. Petroni and Shackelford (1995) employ this tax measure because it enables them to convert various state systems for taxing insurers to one comparable measure. Unfortunately, ETR masks cross-insurer rate differences and includes taxes and premiums from life and health insurance companies. Petroni and Shackelford (1995), however, assert that the inclusion of life and health insurers should not materially affect inferences because states tax the two sectors similarly. ETR also fails to distinguish between insurer taxes arising from premium taxes and insurer taxes arising from income taxes. installment payday loans

To provide some segregation of these effects, a variable indicating the presence of an income tax in the state (INCDUM) is included in the regressions using ETR as an explanatory variable. No prediction is advanced for INCDUM because it is unclear whether prices are lower in income tax states or premium tax states.