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Background on the Tax:

Kentucky policyholders often have questions about the taxes that show up on their premium notices.  Kentucky law permits local governments to impose taxes on premiums charged by insurance companies, although not all of them do. According to the latest information available from the Kentucky Department of Insurance (DOI), 362 municipalities and 42 counties currently impose insurance premium taxes.

The collection of these taxes is administered entirely at the local level although DOI has the responsibility to monitor and oversee compliance by insurance companies.  The law allows each local government to set its own rates and to decide what rate applies to each type of policy. However, local governments may not tax most types of health insurance or workers’ compensation insurance.

There is a lot of information on the DOI website about the local government premium tax. The main page for information about the tax can be found here, and forms and documents related to the tax can be found here. The latter link directs interested parties to lists of which jurisdictions charge the tax, what rates they charge on different lines of insurance, and other useful information, and many of those forms are available in Excel or as PDF files.

Where does this tax go? That is up to each local government, but in general, it goes to each community’s general fund along with property taxes and occupational license taxes. The insurance premium tax is an important source of revenue for local governments even though it is generally one of the least known of all the local taxes.

This tax should not be confused with the state insurance premium surcharge which is also assessed on most types of insurance policies.  The state imposes a 1.8% tax and those revenues are dedicated to the Firefighters Foundation Program fund and the Law Enforcement Foundation Program fund. Policyholders should see the local tax (if it is imposed) and the state tax as two separate line items on their premium notices.

There is also a collection allowance that may be added to the local insurance tax by the insurer to offset the cost of collecting the tax for the local governments. This allowance is limited to 15% of the tax or 2% of the premium, whichever is less, and it usually appears on the premium notice as part of the local tax.

Past Legislative Reforms:

In the 2008 session of the Kentucky General Assembly, IIK was an integral part of a cooperative effort between insurers and representatives of local governments to reform the administration of local insurance premium taxes. Those efforts resulted in the passage of HB 524 sponsored by Rep. Steve Riggs (D-Louisville).

Prior to the passage of this bill insurers and local governments faced many conflicts in administering the tax, chiefly centered on the difficulty that insurers faced in identifying in which tax jurisdiction a policyholder lived. Did a policyholder live in the city limits or outside the city limits in the county?  The answer to that question determined what tax rate would be applied and to which local government the tax would be remitted.

Among the other difficulties faced by insurers was the fact that many cities had not updated their boundaries with the Secretary of State as required by law. That and the inherent difficulty of pinpointing postal addresses on a map made it difficult for insurers to be certain that they were correctly identifying the correct tax jurisdiction for a policy when they prepared a quote or did the billing.

As a result of these uncertainties, local governments were often convinced that they were not getting all the taxes that they had coming. Insurers, on the other hand, were often concerned that they would face administrative penalties, and sometimes litigation, for not properly identifying the proper tax jurisdiction.

HB 524 went a long way toward resolving many of those concerns.  Among other things, HB 524 made the following improvements:

• Required insurers to give policyholders notice about the premium tax including the jurisdiction for which the tax was assessed. This allowed policyholders to identify errors more easily.
• Required insurers starting in 2010 to use risk location technology verified for accuracy by the DOI. The goal of this provision was to make it more likely that insurers will properly collect the tax and make timely payments of taxes due to local governments. The risk location systems combine GPS-like mapping with local government boundaries as recorded by the Secretary of State to identify each address with its tax jurisdiction.
• Established a Premium Tax Advisory Council (PTAC) made up of representatives of local governments and insurers.  The Executive Director of IIK was appointed to a seat on the PTAC and is currently serving his third term on the Council.

Problems Still Remain:

Despite the passage of HB 524 and subsequent “clean-up” legislation, there are still a number of difficulties in administering the current system. The main problem faced by insurers is that it must deal with each local government that imposes a tax rather than with a central authority. Each insurance company faces the prospect of filing thousands of forms and preparing thousands of checks for local governments each year in order to remain in compliance.

This system is unique to Kentucky. While other states allow local governmental entities to impose premium taxes, all other states collect and administer them on a centralized basis.  The high compliance costs resulting from decentralized administration of the taxes must necessarily be passed on to policyholders in Kentucky.

IIK’s Solution:

From a public policy perspective, Kentucky’s present system hurts all Kentucky citizens and businesses and is a costly and inefficient way to raise tax revenue. IIK advocates centralized collection and distribution of the taxes by an entity acceptable to insurers and local governments as well as more uniformity among local ordinances to make administration of the taxes easier.

In advocating for centralized administration and more uniform ordinances, we do not advocate uniform rates for all local governments. The local government insurance premium tax is an integral part of local government revenues, and we do not advocate any solution that would harm the funding of local governments. We would simply like to see improvements in the administration of this tax.

IIK believes that further improvements in the administration of local insurance premium taxes would benefit taxpayers, local governments, and insurance companies and their customers.  We plan to work cooperatively with local governments and other interested parties to make this goal a reality.