Impact of the Insurance Premium Tax Rate Reduction

ISSUE REVIEW


Fiscal Services Division

January 21, 2009
Impact of the Insurance Premium Tax Rate Reduction
ISSUE
In 2002 (SF 2318 – Insurance Premium Tax Reduction Act), the Iowa General Assembly
approved a reduction in the Insurance Premium Tax rate from 2.0% to 1.0%. The reduction was
phased in at the rate of one-quarter percent annual increments over a five-year period,
beginning with life and health insurance policy payments made on or after January 1, 2003.
Calendar year 2007 was the first year all premiums were taxed at 1.0% and FY 2008 was the
first full fiscal year at the 1.0% rate.
Insurance premium tax is paid only by insurance companies. The companies that benefit from
the tax reduction are uniquely identified in government employment statistics. This allows for a
unique opportunity to evaluate both the revenue impact and the employment impact of the tax
rate reduction in SF 2318. This Issue Review focuses on the General Fund revenue impact of
the rate reduction and the Iowa employment trends for the insurance industry since the rate
reduction legislation was approved.
CODE AUTHORITY
Chapter 432
BACKGROUND
Insurance carrier employment is a significant contributor to Iowa total employment. Iowa’s total
insurance carrier employment equaled 30,071 for calendar year 2007, a level that ranked Iowa
15th in total U.S. insurance carrier employment. In contrast, total private sector employment for
Iowa ranks 24th among the 53 states and territories.1 Iowa insurance carrier employment equals
2.4% of total private employment in Iowa, while U.S. insurance carrier employment equals 1.1%
of total U.S. private employment.
Iowa reduced the insurance premium tax rate from 2.0% to 1.0% in part to make Iowa domiciled
insurance companies more competitive in states with a tax rate lower than 2.0%.
The method states use to tax insurance companies is unique in state business taxation. For
most states, insurance companies do not pay corporate income tax on profits derived from
insurance sales. Instead, insurance companies pay a tax equal to a set percent of premiums
collected on policies issued within a state. That rate currently ranges from 0.500% to 4.265%
nationally. In addition, states have retaliatory tax provisions that require companies not
domiciled within that state to pay a tax rate equal to what a domestic (in-state) company would
pay in their home state, if the taxes owed would be higher. This domicile provision creates a
situation where lowering the tax rate in a state will lower the taxes paid by that state’s
companies to other states.

1The employment numbers and rankings include the 50 states, Puerto Rico, the Virgin Islands, and Washington, DC.

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January 21, 2009

Reducing the insurance premium tax rate in Iowa from 2.0% to 1.0% allows companies to either
profit 1.0% more from insurance sales or allows consumers to purchase insurance at a 1.0%
lower rate. The Iowa rate reduction also reduces taxes paid to certain other states by Iowa
companies selling insurance in those states due to reduced or eliminated retaliatory tax
calculations. If Iowa-based companies are 1.0% more profitable on Iowa sales and if Iowa-
based companies are more competitive and profitable in other states, they may expend some of
the additional profits employing more Iowans.
ESTIMATED REVENUE IMPACT
Estimating Insurance Premium Tax Reduction
For the year prior to the start of the Insurance Premium Tax phase-down (FY 2003), Iowa
received $145.8 million in Insurance Premium Tax revenue. For FY 2008, Iowa received $111.7
million. To estimate the amount of tax revenue the State would have received had the rate
remained at 2.0%, Iowa’s receipt history for that time period was compared to the history of all
states and territories. Table 1 provides the actual receipts, estimated receipts had the rate not
been reduced,2 and a difference column. The estimate concludes that the direct impact on
General Fund tax receipts was a reduction of $65.7 million in FY 2008 and $245.4 million over
the five fiscal years since the rate phase-down was initiated.
Table 1
Insurance Premium Rate Reduction Impact Estimate
In Thousands of Dol ars
Actual Iowa
Estimated Iowa
Estimated
Insurance
Receipts
Direct
Premium
W ithout Rate
Fiscal
Receipts
Reduction
Impact
FY 2003
$ 1
45,836
$ 1
45,836
$ 0

FY 2004
144,629
161,132
-16,503
FY 2005
131,183
171,027
-39,844
FY 2006
121,428
173,478
-52,050
FY 2007
105,223
176,498
-71,275
FY 2008
111,653
177,399
-65,746
Total
$ - 245,417


2Actual Iowa and national insurance tax revenues were provided by the U.S. Census Bureau. Insurance revenue
amounts by state and by year are found at http://www.census.gov/govs/www/statetax.html and were accessed in
October of 2008. Actual Iowa receipts for 2003 and 2004 were adjusted for:
1. A positive $10.0 million withdrawal from insurance premium receipts authorized by the General Assembly.
2. A negative $6.4 million to account for a change in the tax due dates. That amount was added to the 2004
amount, for a net adjustment of zero across the two years.
For the five-year period preceding the start of the tax decrease (1998 through 2002), Iowa insurance premium tax
revenue grew 34.0%, or 93.4% of the U.S. rate of 36.3% over the same time period.
To estimate the level of Iowa Insurance Premium Tax receipts without the rate reduction, tax receipts for 2003
through 2008 were assumed to have grown at a rate equal to 93.4% of the U.S. growth rate each year.

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Additional Significant Insurance Industry Incentive
The tax rate reduction is not the only insurance industry expansion incentive available.
Insurance companies are eligible for several significant economic development tax incentive
programs. The Department of Economic Development (DED) reports that several insurance
carriers have received financial incentives to increase employment in Iowa since enactment of
SF 2318. The largest of those was to support construction of the Allied/Nationwide Insurance
buildings in downtown Des Moines.3 That project received a State and local incentive package
totaling approximately $109.0 million over 20 years.4
Estimating the Change in Employment
Reducing the Insurance Premium Tax rate has three impacts on Iowa employment that may be
estimated.
1. Direct impacts on employment by insurance companies in Iowa due to reduced taxes
owed to Iowa and retaliatory taxes to other states.
a. The impact of the rate reduction on all companies selling within the State. All
Iowa-domiciled companies as well as companies domiciled in other states with a
tax rate lower than 2.0% benefited from a reduction in the amount of tax owed to
the State of Iowa. If a company benefiting from this reduction in the Iowa tax rate
has a significant employee base in Iowa, the company may choose to employ
more Iowans.
b. Iowa-domiciled companies doing business in other states with a tax rate less
than 2.0% saw a reduction in the Insurance Premium Tax owed in several other
states. If a company benefiting from this reduction in retaliatory taxes has a
significant employee base in Iowa, they may choose to employ more Iowans.5


3Several smaller projects were not included in the job creation incentive expense calculation. Also, two recently
approved large projects, Wel mark in downtown Des Moines and AVIVA in West Des Moines, are not included in the
incentive calculation since the buildings are not yet complete so it is assumed employment has not been impacted.
4The LSA collected information from the Iowa Department of Economic Development, Polk County, and the City of
Des Moines concerning the incentive package associated with the Allied/Nationwide project. Identified incentives
include:
1. Job training tax credits (employee income tax withholding) - $17.9 million
2. Investment tax credits - $13.3 million
3. Reimbursement of Sales/Use tax paid during construction - $3.3 million
4. Physical Infrastructure Assistance Program Forgivable Loan - $7.7 million
5. Polk County grant - $10.0 million
6. City of Des Moines financial assistance totaling $56.8 million over 20 years
7. Partial property tax abatement during construction on two buildings and for ten years on two parking ramps.
Once constructed, the Allied/Nationwide properties should create approximately $160.0 million in new taxable value.
At FY 2009 property tax rates, this amount would generate $7.3 million in annual property tax revenue once all
abatements are exhausted. Of that annual amount, approximately $928,000 will go towards local government debt
levies, $2.0 to $3.0 million will be used by the City of Des Moines to pay incentives to Nationwide, and the remainder
will be available to the City of Des Moines as Tax Increment Financing revenue, should the city choose to capture it.
5A company is not required to have a significant portion of its workforce in Iowa to be an Iowa-domiciled company.
The website of the Insurance Division lists 94 Iowa-domiciled insurance carriers. The Division website lists out-of-
state address for 20 of the 94.

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c. Companies domiciled in states with an Insurance Premium Tax rate in excess of
1.0% may choose to become an Iowa-domiciled company and may choose to
move employment to Iowa. Becoming an Iowa-domiciled company will lower the
company’s tax payments in several other states.6
2. Indirect and induced employment impact due to the expansion of insurance industry
employment in Iowa. Companies providing services to the insurance industry will
expand employment if the industry expands (indirect employment gains), and the
additional insurance industry employees will expend a portion of their salaries in Iowa
and this will further expand employment (induced employment gains). This impact is
often referred to as a “multiplier effect.”
3. Impact on State government finances - Reducing Insurance Premium Tax rates reduces
the amount of revenue raised by Iowa. Unlike the federal government, Iowa government
cannot run a deficit so a reduction in one revenue source must be compensated through
either an increase in another revenue source, a reduction in expenditures, or a
combination of the two. Increasing another tax or decreasing government expenditures
both have negative impacts that offset the positive impacts of the Insurance Premium
Tax reduction to some degree.
The first step is to estimate the direct employment gains (item 1 above). Iowa insurance
industry employment increased 2,144 jobs from the year prior to enactment of SF 2318 through
2007. However, insurance industry employment for the United States actually contracted during
that time period. This analysis assumes the U.S. rate of insurance industry employment growth
is the base growth rate, with Iowa employment growth calculated from that base. For 2001,
Iowa insurance industry employment equaled 2.13% of U.S. employment for the industry. By
2007, that ratio expanded to 2.38%. Table 2 calculates the difference between actual Iowa
employment and the level of Iowa employment expected had Iowa remained at the 2001 level of
2.13% of U.S. insurance carrier employment.

6The Iowa Insurance Division reports that since 2002, twelve insurance companies have changed their
domicile to Iowa and four Iowa companies have changed their domicile from Iowa to another state. Of
the twelve moving to Iowa, four are from states with a lower tax rate than Iowa and the remaining eight
are from states with rates ranging from 1.4% to 2.0%. For four of those eight, the Insurance Division’s
official mailing address for the company remains outside of Iowa.
All four companies that changed their domicile status from Iowa to another state changed to a state with a
higher rate than Iowa’s current 1.0%.

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Table 2
Iowa and U.S. Insurance Carrier Employment
Potential Iowa
U.S. Total
Iowa
Insurance
Insurance
Insurance
Carrier
Calendar
Carrier
Carrier
Iowa % of
Employment
Year
Employment
Employment
U.S. Total
Increase *
2001
1,312,143
27,927
2.13%
0
2002
1,299,475
27,716
2.13%
59
2003
1,307,566
27,725
2.12%
-105
2004
1,279,985
27,747
2.17%
504
2005
1,270,738
28,126
2.21%
1,080
2006
1,270,478
29,155
2.29%
2,115
2007
1,264,840
30,071
2.38%
3,151
*Assumes Iowa had remained at 2.13% of U.S. total if the tax reduction
and other incentives were not offered.

The second step is to estimate the multiplier effect for indirect and induced job creation, that is,
the number of additional jobs created for each direct job created. For this analysis, a multiplier
effect for job creation of 2.23 is used.7 This means for every 100 direct jobs created, 123
indirect jobs are also created due to the increased economic activity generated by the direct
jobs. With a multiplier of 2.23, the direct job increase of 3,151 would produce an additional
3,876 indirect jobs.
The third step is to estimate the number of job reductions associated with the State fiscal
response to the tax revenue reduction associated with the Insurance Premium Tax rate phase-
down. For the purpose of estimating the Iowa fiscal response, the Regional Economics Model,
Inc. (REMI) model was used. A model simulation was used to reduce Iowa government
expenditures by the amounts shown in the right hand column of Table 1, with a $65.746 million
decrease assumed for year six and future years. The model results indicate an employment
reduction of 1,211 by the sixth year, with similar reductions for each year going forward. The
REMI model results include both direct and indirect impacts.

7The LSA research produced four job creation or income multipliers used publicly for calculating employment
feedback for Iowa insurance industry job creation. The Department of Economic Development economic model
created in 2003 used 1.77, the Regional Economics Modeling, Inc. (REMI) model purchased by several State
agencies uses about 1.60, Des Moines City Council minutes of February 1, 2000, reference 2.23 from a study the
City commissioned from David Swenson, an economist at Iowa State University, and the model used by Ernst &
Young, LLP to create impact projections for 2002 legislative discussions of SF 2318 used a multiplier of 2.60.

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Table 3
Estimated Net Employment Gain Due to
Insurance Industry Incentives
Number of
Jobs
Direct Employment Gains
3
,151
Indirect Employment Gains
3
,876
Deduction Due to Reduced
Government Expenditures
( 1,211)
Net Job Creation
5,
816

FISCAL IMPACT
This analysis indicates Iowa’s Insurance Premium Tax change reduced industry tax payments
to Iowa by $245.4 million through FY 2008, with annual direct revenue reductions going forward
of at least $65.7 million. In addition, State and local incentives to one insurance company
expansion totaled an estimated $109.0 million over 20 years. Two more significant expansions
have also received benefits and are in the planning and construction phases. Those two
projects may further increase Iowa’s share of insurance industry employment, but they will also
significantly increase the amount of taxpayer incentives provided to the industry.
Since enactment of the rate reduction in 2002, Iowa insurance carrier employment has
expanded faster than insurance carrier employment in the U.S., indicating the tax reduction and
other incentives may have had a positive impact on Iowa employment. This analysis estimates
that by the end of 2007, Iowa employment may have increased by 3,151 insurance carrier jobs
and by 5,816 jobs overall due to the Insurance Tax rate reduction as well as State and local
company-specific tax incentives.
Increased employment produces a revenue “feedback” as the employer expansions and new
jobs produce increased economic activity. This feedback will replace a portion of the State and
local revenue reduction associated with the insurance industry tax incentives.
As a reference, the LSA calculates that in Iowa, State and local governments currently collect
approximately $7,700 in taxes per job per year, so 5,816 average jobs would produce a total of
$44.8 million in State and local taxes each year.
Compared to other states, Iowa has a low unemployment rate and a high labor force
participation rate. This means that compared to other states, it is more difficult in Iowa to
expand employment without drawing in workers from outside the borders. To the extent the
increased employment expands Iowa’s population, State and local governments will see
increased demand for services. Some portion of the revenue feedback discussed in the
previous two paragraphs will be needed to pay for government service expansion.
As an example expense, there is one child in the public K-12 school system in Iowa for every
3.17 jobs, and each child takes $9,970 on average in State and local tax revenue to educate

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each year.8 Using these averages, the children of 5,816 employed Iowans cost $18.3 million to
educate each year.
CONCLUSION
The structure of State insurance industry taxation provides a unique opportunity to evaluate the
results of stimulative efforts to maintain and increase industry investment and employment in
the State of Iowa. This analysis shows that while the efforts to expand the industry may have
produced positive results in terms of capital investment and job creation; the taxpayer
investment to produce those results has been significant in recent years.

STAFF CONTACT: Jeff Robinson (Ext. 14614)


8For the education expense calculation, the most recent annual average of Iowa non-farm jobs was used (1,523,100)
and the FY 2009 budget enrollment of 480,609 students (K-12). Taxes for education include all State General Fund
appropriations to directly support K-12 public education, property taxes collected by schools, General Fund school
infrastructure support (former local option), and local option income surtax revenue for schools.

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