Net Income Taxation of the Life Insurance Industry at the State Level

Abstract

Premiums, variously defined, have been the basis for taxation of the life insurance industry at the state level since the early 1800's. For other industry, net income is now the basis. Differences in taxation bases, of course, are not unusual. The reasons for such differences articulate with notions of ability to pay, benefits received, general social obligation, administrative convenience, and so forth. In general, the form of any tax law represents at least the legislative view of the financial responsibilities of business to government. Implicit too is the assumption that differences in taxing bases are necessary to produce equity in tax treatment-that fairness which the legislative body believes should exist among various tax-paying groups. This article examines the implications of this latter assumption for the taxation of the life insurance industry by the states. While state tax laws vary considerably with respect to life insurers, there is sufficient uniformity in method to permit the use of California's laws for generalizations which are applicable to all states. First, there is a general sketch of the bases for taxation in California of general corporations, financial institutions, and insurance companies (which follows the divisions of the tax law). Second, the rationale which has dictated the use of diffprinr base.s for tnyincr busines is considered, with particular emphasis on the differences marking the tax treatment of life insurers. Third, an attempt is made to demonstrate the nature of the business tax burden imposed on the life insurance industry vs. other industry.1