State Insurance Tax Discrimination Case Won’t Be Reheard

May 15, 2008

We received word yesterday that the South Dakota Supreme Court has declined to rehear the Metropolitan Life Ins. Co. v. Kinsman insurance tax discrimination case; the Tax Foundation had filed an amicus brief in support of the petition for rehearing. South Dakota is one of 8 remaining states that seek to protect their domestic insurance companies by imposing heavier taxes on out-of-state companies that do business in the state. The result is effective discrimination against out-of-state companies, which violates the Equal Protection Clause, as the trial judge concluded.

The issue raised by the Kinsman case implicates states with similar discriminatory insurance tax systems. It is most relevant for states with similar statutes: Colorado, Hawaii, and Nevada, where domestic companies also automatically qualify for a lower rate but out-of-state companies have to clear additional burdens and often fail to do so. Louisiana and Mississippi condition the lower rate on investing 25% of the company’s assets in state, which few companies can do (and would be impossible to do if five states adopted such a rule). Indiana is the only remaining state which still explicitly discriminates, with out-of-state companies paying higher rates as a matter of law. New Jersey curiously discriminates the other way by enabling out-of-state companies to create in-state subsidiaries that pay lower taxes than domestic companies.

Drawing on the Tax Foundation brief in the Kentucky v. Davis case and the principles of sound tax policy, our brief argued that states cannot promote in-state economic development by punishing out-of-state companies or economic activity with heavier taxes. The state should aim to tax all similar activity at the same general rate in order to maintain a neutral tax system.

We will continue to track similar cases and raise awareness on the issues involved.

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