The taxation of insurance companies is a bit like baseball. Some of the most significant limitations on the states’ taxing powers are based on the prohibition of state interference with interstate commerce. That said, there is generally no federal or state constitutional prohibition to a state’s insurance premium tax. This is because, like baseball, the “business of insurance” is not “commerce.”
Insurance premium taxes are a form of gross receipts or excise tax. As such, they are not based on profits or earnings, and they are not affected by the cost of providing insurance coverage or other expenditures. Just as there are no free hotdogs at the baseball park, nothing in an insurance company is unaccounted for (this is to be expected because they are in the business of math and actuarial science). Thus, while insurance premium taxes are imposed and paid by your auto insurer, that tax burden is fully accounted for in the rates we pay.
As it happened last night, the Republican controlled House pitched a tax increase by repealing a state tax credit utilized by automobile insurers. Specifically, Section 637 of the Income Tax Act [206 MCL 1 et seq.] allows auto insurance companies to claim a tax credit against tax based on amounts paid in the previous tax year to various associations and facilities. One such facility is the MAIPF (the Michigan Automobile Insurance Placement Facility) and within that facility is the Michigan Assigned Claims Plan (MACP) which covers catastrophic claims for those injured but do lack insurance. Under the bills passed by the House, amount paid to the MAIPF that are attributable to the MACP will no longer be creditable. The repeal is retroactive to the first of this year. It is anticipated that bills will save the state $80 million, but it may be a sacrifice fly for Michigan auto policy holders, likely to pick up that cost in the form of higher automobile premiums.
Fraser Trebilcock attorney Paul 
V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.