The American insurance industry is unique in many ways. Included among its quirks is an interlocking, state-by-state “retaliatory tax” framework that ensures that equally low taxes will be levied on insurance companies across the country no matter where they do business. The gist of this “retaliatory tax” system is that if one state decides to impose a comparatively more onerous tax on insurance companies, then every other state will punish that state’s insurance companies by imposing a retaliatory tax against them in response. With the sole exception of Hawaii, every state has enacted a retaliatory insurance tax statute for this purpose.
To illustrate the practical effect of this framework by way of example, suppose that Alabama and Tennessee each tax insurance companies in exactly the same way, and further, that some number of Alabama insurance companies do business in Tennessee (and vice versa). To close a budget deficit, however, Alabama decides to raise taxes on insurance companies that do business in Alabama. Thereafter, in response, Tennessee’s “retaliatory tax” statute authorizes Tennessee’s insurance commissioner to levy a punitive tax on all of the Alabama insurance companies that do business in Tennessee. Additionally, every other state (except Hawaii) would punish Alabama’s insurance companies in exactly the same way. Considered broadly, this practice has been described as “holding hostages to coerce another sovereign to change its policies.” Continue reading Five Pennsylvania insurance companies recoup $16 million in tax payments after Tennessee Supreme Court holds that retaliatory taxes were improperly assessed