The Impact of State Taxes on Self-Insurance
Nanyang Technological University
Kathy R. Petroni
Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management
Douglas A. Shackelford
University of North Carolina at Chapel Hill; National Bureau of Economic Research (NBER); University of North Carolina (UNC) at Chapel Hill - Accounting Area
NBER Working Paper No. w7453
This paper assesses whether insurers' state taxes reduce purchases of property-casualty coverage. Tests are conducted using state aggregates of insurer-level data from publicly-available, annual accounting reports for 1993, 1994, and 1995. A positive relation between self-insurance and state taxes is detected, consistent with consumers opting to self-insure rather than bear the incidence of higher insurer taxes. The primary empirical estimates imply that a 1 percent increase in the state premium tax rate reduces non-automobile insured losses by 0.18 percent to 0.28 percent. These elasticities suggest that for the mean state, a standard deviation increase in the state tax rate (0.5 percent) would lower insured losses by approximately $140 million or 7.5 percent of current coverage. As expected, tax effects vary with the elasticity of demand. When demand is largely inelastic, e.g., automobile liability coverage, taxes do not affect self-insurance.
Number of Pages in PDF File: 39working papers series
Date posted: June 19, 2000
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