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The Effect of Taxes on the Location of Property‐Casualty Insurance Firms
Author(s) -
Grace Martin F.,
Sjoquist David L.
Publication year - 2020
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12298
Subject(s) - property insurance , receipt , state (computer science) , liability insurance , business , life insurance , economics , bond insurance , actuarial science , insurance policy , general insurance , monetary economics , auto insurance risk selection , accounting , algorithm , computer science
Abstract States levy insurance premium taxes, which are essentially gross receipt taxes on premiums. An unusual characteristic of insurance premium taxes is that in each state in which an insurance company writes premiums, the firm pays the higher of the tax rate in the state in which the company is domiciled and the state in which the policy is written. Thus, the choice of location has a significant effect on the firm's tax liability. Using firm‐level data for the property‐casualty (P‐C) insurance industry, we calculate the firm‐specific tax rate for each P‐C firm for every possible state of domicile. We estimate conditional logistic models to analyze the effect of insurance premium taxes on the choice of the state of domicile of existing and relocated firms. We find robust evidence of a small, negative, and statistically significant effect of these taxes on the choice of the state of domicile.