September 25, 2011

Insurers Net Millions in Tax Credits

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A line of boxcars delivers coal to the AES Shady Point power plant near Spiro. Insurance companies claimed almost $56 million in tax credits under the Oklahoma Coal Production Incentive Act between 2004 and 2011.

Jaclyn Cosgrove/Oklahoma Watch

A line of boxcars delivers coal to the AES Shady Point power plant near Spiro. Insurance companies claimed almost $56 million in tax credits under the Oklahoma Coal Production Incentive Act between 2004 and 2011.

Various credits against the tax levied on insurance premiums have totaled $430 million since 2004, an amount that has taxpayers, lawmakers and lobbyists debating the value of some tax credits amid tight state budgets.

Also affected have been the funding levels for three of the state’s public safety pension systems, which receive more than half of the allocations each year from the insurance premium tax.

“Without getting into the wisdom of transferable tax credits, I’d sure like to see some way for the pension systems to be held harmless,” said Bob Jones, executive director of the Oklahoma Firefighters Pension and Retirement System. “Long-term, that has significant funding issues for the pension system. It can add up to a lot of money.”

The firefighters pension system receives 34 percent of the insurance premium tax. The Police Pension and Retirement System gets 14 percent, while the Oklahoma Law Enforcement Retirement System receives 5 percent. The remainder of the premium tax collections goes to the state’s general revenue fund.

In a three-year period from 2007 to 2009, the loss to the firefighters system from transferable tax credits used by insurance companies was more than $28 million.

That’s according to an Oklahoma Insurance Department analysis prepared for the Legislature in March.

The police pension system lost out on about $11.6 million, while several transferable tax credits took about $5 million from the law enforcement system during that same period, the analysis found.

“I understand the tax credits are used to lure businesses into the state, but in some respects you’re robbing Peter to pay Paul because the pension funding is a responsibility also,” said Steve Snyder, executive director off the police pension system.

Premium taxes

Instead of corporate income taxes, insurance companies pay a flat, 2.25 percent tax on premiums in Oklahoma. Premium tax collections totaled $1.2 billion — or an average of about $153 million each year — from fiscal years 2004 to 2011.

Insurance company representatives said the premium tax is oftentimes more onerous than an income tax. Expenses such as salaries and other business costs can be deducted under corporate income taxes but not under the premium tax.

“We pay premium taxes whether we make money or not,” said Terry Detrick, president of Oklahoma City-based American Farmers and Ranchers Co-Op, which has an affiliated insurance company.

Tax credits for economic development made up more than $262 million of the tax credits claimed against the insurance premium tax from fiscal years 2004 to 2011, according to Insurance Department data obtained by The Oklahoman. Another $83 million in credits came from various guaranty funds to prop up failed insurance companies. Meanwhile, about $84 million in credits were claimed for selling federal flood insurance or providing insurance to public authorities.

Several insurance companies have claimed more than $92 million in home office tax credits from 2004 to 2011. The credit is available for insurance companies that employ at least 200 people at a headquarters or regional office.

Jim Walker, an attorney and contract lobbyist for State Farm Insurance, said the company created more than 1,500 jobs when it moved a regional office to Oklahoma. State Farm affiliates have used more than $14 million in home office credits from 2005 to 2009, according to Oklahoma Insurance Department filings.

“I think we can make a good case this home office tax credit significantly benefits Oklahoma,” Walker said. “If the purpose of tax credits is to create jobs, then it certainly did that.”

Other top users of the home office tax credit from 2005 to 2009 were Health Care Service Corp. ($11.1 million), the parent company of Blue Cross and Blue Shield of Oklahoma; and Farmers Insurance ($8.8 million).

OTHER CREDITS

Other types of transferable tax credits also have been claimed by insurance companies. Almost $56 million in credits were claimed under the Oklahoma Coal Production Incentive Act between 2004 and 2011, according to the Insurance Department.

Last year, the Legislature put the coal credit under a temporary moratorium until July 2012. That means no new credits can be generated. But the credit can be carried forward to up to five tax years, so companies qualifying for it before 2010 may still claim it on their tax forms.

Meanwhile, American Farmers and Ranchers claimed $5 million in rural small business venture capital tax credits from 2005 to 2009. Detrick said the tax credits allowed the company to keep its rates down for policyholders even as large losses were payable from severe storms, drought and wildfires in the last few years.

“We think it’s been beneficial in many ways,” Detrick said. “It’s beneficial for making investment capital available and beneficial for us financially to be able to continue to provide products at a more affordable price for the taxpayers across the state.”

Other insurance companies using the rural small business venture capital tax credits from 2005 to 2009 were the Oklahoma Farm Bureau ($8.8 million) and United Healthcare ($4.2 million).