The Pfundstein Report

You may know that the cost of insurance includes a 2 percent tax on the premiums you pay. House Bill 678, which resulted from the work of a legislative study committee, would decrease the tax from 2 percent to 1 percent for property and casualty and life insurers. The bill is not likely to pass this year due to the current fiscal issues challenging the state. This is unfortunate. However, retaining the bill for future consideration is much more preferable than simply killing it.

Reducing the insurance premium tax would provide substantial economic stimulus, create over 1,600 new jobs over the next several years and add over $61 million annually to personal incomes in New Hampshire. These conclusions were reached in a study conducted by Ernst & Young’s Quantitative Economics and Statistics Group in a report issued dated Feb. 15. The proposed reduction will make New Hampshire insurance companies more competitive nationwide. It will encourage new insurance company start-ups. Additionally, New Hampshire will become a magnet for other insurance companies to relocate or “redomesticate” to New Hampshire.

How does all this work? New Hampshire’s domestic insurance companies currently pay a 2 percent premium tax for business written in New Hampshire and elsewhere, even if the other states in which they write business charge less than 2 percent. This is due to the retaliatory tax laws affecting insurance companies doing business across state lines.

For example, Nebraska which has a 1 percent premium tax charges New Hampshire domestic insurance companies 2 percent for business written in Nebraska because New Hampshire charges Nebraska domestic insurance companies 2 percent for any business written in New Hampshire.

Cutting the insurance premium tax will reduce the retaliatory taxes paid by New Hampshire domestic insurance companies, increase their competitiveness and expand the number of insurance jobs in New Hampshire.

The study projects an increase of 750 insurance jobs, which in turn indirectly creates another 733 non-insurance jobs and an additional 163 New Hampshire jobs by reducing the cost of insurance to New Hampshire businesses. Jobs are created because domestic insurance companies will expand, other insurance operations will redomesticate to New Hampshire to take advantage of the lower premium tax, and the increased insurance employment will indirectly create other jobs.

The study reported that from 1998 to 2003, Ohio, which lowered its premium tax rate from 2.5 percent to 1.4 percent, had the most net redomestications into the state, while California, which has a premium tax of 2.35 percent — well above the national average — had the largest number of net redomestications out of the state.

If the state does not reduce the premium tax, it is not simply a matter of foregoing the creation of 1,600 new jobs and $61 million of additional personal income. We will likely continue to lose insurance companies to other states.

Between 1999 and 2003, four companies moved out of New Hampshire. One went to Nebraska, which has a 1 percent premium tax, and two redomesticated to South Carolina, which has a rate of 1.25 percent. The fourth simply moved across the border to Massachusetts. Doing nothing not only loses the benefits of increased jobs and related economic activity, but is likely to result in further redomestications out of the state with associated job losses.

The state’s total investment to create over 1,600 jobs and the related economic benefits is projected by Ernst & Young to be $4.6 million in the form of a net reduction in revenue. When local government increases in revenue are factored in, the net state and local revenue loss, or true investment, is a mere $2.6 million. Should our state and local governments (you and your neighbors) invest $2.6 million in foregone revenue to produce 1,600 jobs and an additional $61 million in annual personal income? It seems like a pretty sound investment to me.

Donald J. Pfundstein is managing director of the Concord law firm of Gallagher, Callahan & Gartrell. He can be reached at pfundstein@gcglaw.com.