An Analysis of Premium Tax Revenue and Rate in California: The Case of Structured Settlement Annuities

Abstract

In recent years the use of single annuities in order to fund payments for structured settlements in personal injury cases has grown rapidly. The basic mechanism is for defendants (or their insurers) who experience adverse verdicts or settlements requiring periodic payments to purchase an annuity with promised payments that match those for which they are liable. This arrangement permits the satisfaction of the defendants' obligation on a lump sum basis and at the same time permits the receipt of a periodic compensation stream by the victim. Indeed, in such cases annuities and annuity carriers play precisely the role for which annuities were designed and in which annuity carriers have the required expertise. Laws governing the rates of tax on periodic structured settlement annuities have, because of the surge in demand in this market, become an issue of great interest to insurers. This type of annuity is classified as non-qualified and subject to taxation at varying rates in the states of Alabama, California, District of Columbia, Iowa, Kansas, Kentucky, Maine, Mississippi, Missouri, Nebraska, Nevada, North Carolina, South Dakota, Tennessee, West Virginia and Wyoming. In addition, premiums written by insurers domiciled in these states and reported in states that do not normally collect on structured settlement annuities but do have retaliatory tax provisions are subject to premium taxes on a retaliatory basis. While it may be argued that taxation of structured settlement annuities should be eliminated altogether, from a more practical perspective in these budget conscious times, there is a concern for revenue loss in those states that currently receive from sales of such annuities if the