Tax Foundation Urges a Stop to South Dakota’s Discriminatory Insurance Taxes

April 16, 2008

The Tax Foundation, in a friend-of-the-court brief filed with the South Dakota Supreme Court, urges that state to stop its discriminatory insurance tax system that taxes out-of-state companies at twice the rate of in-state companies. The case, Metropolitan Life Ins. Co. v. Kinsman, is currently before the court on a petition for rehearing.

Since explicit discrimination in rates was struck down as violating the Equal Protection Clause of the Fourteenth Amendment by the U.S. Supreme Court in 1985, 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 doing business in the state. While on paper all companies pay the same 2.5% rate, in-state companies automatically receive rate reductions, lowering their tax bill to 0.75% to 1.25%. The result is effective discrimination against out-of-state companies which violates the Equal Protection Clause, as the trial judge concluded.

While the trial judge invalidated the statute in this case, late last month the state Supreme Court reversed. Our brief argues that the court’s decision is problematic because (1) it does not consider the Findings of Fact by the trial judge, (2) the standard adopted by the Court will be problematic, and (3) the statute does not survive rational basis review.

A decision on the petition for rehearing is expected in April or May.

Click here to read the press release. Click here for a summary of the brief and to download the brief itself.

Click here for more on the Tax Foundation’s Center for Legal Reform.

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