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1 Joseph Henchman & Paul Galindo, Brief Supports Challenge to Punitive Tax on Out-of-State Insurance Companies 1 (2008)

handle is hein.taxfoundation/ffbecxz0001 and id is 1 raw text is: FISCAL FACT August 2008 No. 142 Brief Supports Challenge to Punitive Tax on Out-of-State Insurance Companies By Joseph Henchman and Paul Galindo The Tax Foundation, in a friend-of-the-court brief filed with the Texas Supreme Court, urges the reversal of a Comptroller's ruling imposing additional taxes on insurance companies from other states. The brief explains that allowing the Comptroller's ruling to stand will result in other states raising their tax rates on Texas insurance companies, setting off an interstate tax war and ultimately harming consumers. Insurance Retaliatory Taxes Legitimately Deter Discriminatory Taxes If a state imposes a higher tax on products sold by out-of-state firms than on products sold by domestic firms, such a tax would typically violate the U.S. Constitution's Commerce Clause or the Equal Protection Clause. Insurance retaliatory taxes are an exception to this general rule, as recognized by the U.S. Supreme Court in the landmark 1981 Western & Southern case. States may impose these taxes on an out-of-state insurer if the insurer's home state has a punitive tax on out-of-state companies. The result is that a state is deterred from discriminating against other states' insurance companies, lest its companies suffer retaliatory taxes in other states. For example, assume State A taxes out-of-state insurers at 2.0% of premiums while State B taxes them at 2.5%. In order to equalize the tax burden imposed on State A's companies doing business in State B, State A will impose a 0.5% retaliatory tax on insurers from State B. This serves as a deterrent to State B's discriminatory tax. To be constitutional, the goal of retaliatory taxes must be to equalize tax burdens and discourage discriminatory taxes. The retaliatory tax system has functioned remarkably well in both respects. In 1981, 34 states had discriminatory insurance taxes; since then, FOUNDAT ION