The nasty hidden state tax that Californians all pay — a tax charged in only 7 states

Richard Rider, Chairman, San Diego Tax Fighters Undesignated Leave a Comment

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Here’s a nasty tax that Californians pay every year.  It’s a tax that you are probably completely unaware of — a tax that is charged in only 6 other states.
When you pay for your California homeowners policy, life insurance, car insurance, health insurance, business insurance, annuity — ANY insurance product except “tax qualified” plans (annuity retirement plans, primarily) — hidden inside your insurance bill is a 2.35% CA premium tax — essentially a sales tax.  It’s not broken out as a tax in your bill, nor discussed by your insurance companies when you buy their products.It’s a tax in lieu of the insurance companies paying a corporate income tax on NET profits — the way the vast majority of states choose to tax insurance corporations (if they have a state corporate income tax at all, of course).

I don’t know for sure exactly how we compare with other states overall on this tax, but I DID find the figures on how we rank with our 2.35% annuity premium tax — we are 2nd highest in the nation (Nevada beats us).  I suspect our state’s ranking is similar if not identical for the other forms of insurance, but can’t find a source verifying that such is the case.

Here are the 7 states’ annuity insurance premium tax rates — in alphabetical order:

  • California: 2.35%
  • Florida: 1% (no state income tax)
  • Maine: 2%
  • Nevada: 3.5% (no state income tax)
  • South Dakota: 1.25% (no state income tax)
  • West Virginia: 1%
  • Wyoming: 1% (no state income tax)

http://www.investmentnews.com/article/20140618/FREE/140619928/beware-state-premium-taxes-on-annuities

BTW, the “tax qualified” annuities still include a half-percent CA premium tax. Just a “token” payment that few other states charge.

The prospects of this tax going away in the Golden State are zero. According to the California Legislative Analysts Office, that premium tax collects CONSIDERABLY MORE than what a insurance company CA corporate income tax would gather from insurance companies. Moreover, no one is complaining to Sacramento because no one knows they are paying the tax!  IF people and CA companies DID know, that would be just one more reason to leave our fair state (“fair” as in weather — not tax policy).

Now you know.

Oops.

My bad.

http://www.lao.ca.gov/handouts/Econ/2008/Gross_Premiums_7_24_08.pdf

NOTE: THE EXCERPT BELOW IS FOR WONKS ONLY — YOU DON’T NEED TO READ IT — I SHOULD HAVE NOT EVEN POSTED IT!: It’s the CA LAO language that details the comparison of the CA premium tax vs. our corporate income tax.  I SAY AGAIN — DON’T BOTHER TO READ THIS!

The 2008 May Revision projects that gross premiums tax revenues will total approximately $2 billion in 2008-09. Comparing this to what insurers would pay if, instead, they were subject to the CT [California corporate income tax] is complicated because they do not currently report what their taxable corporate income, if taxed, would generate. One approach, however, to identifying the relative amounts of the two taxes would be to look at federal income tax data on insurers. Economists who have examined state insurance taxes have found that a simple comparison of premiums to net income suggests that insurance premiums tax revenues are several times higher than a profits tax would produce.

This also is true in California. For corporations in the Insurance Carriers and Related Activities industry with net income in 2005, federal income subject to tax was approximately $100 billion. If California taxable income for these insurers comprised about 10 percent of federal taxable income, applying the state’s 8.84 percent CT rate would have generated a little less than $1 billion in revenues. This is much less than the amount of tax paid under the gross premiums tax.

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