Managing Annual Accounting Reports to Avoid State Taxes: An Analysis of Property-Casualty Insurers

31 Pages Posted: 25 Jul 2000 Last revised: 22 Sep 2012

See all articles by Kathy R. Petroni

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 Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 1998

Abstract

We hypothesize that, in their annual accounting reports, insurers allocate premiums and losses from multistate policies to reduce total state taxes. To test this prediction, we examine firm-level data, collected from the publicly-available statutory reports used to compute tax bases and filed with each state government. If insurers manage allocations to avoid taxes, we anticipate an inverse relation between the tax rate and the premium-to-loss ratio, which is the industry's standard measure of the price of a unit of coverage. Firm-specific prices are computed using premium and loss information from the annual regulatory reports filed with each state in which an insurer underwrites. Primary analysis is conducted on 12,573 insurer-state observations from 1993. We find the premium-to-loss ratio is decreasing in state tax rates, consistent with multistate insurers managing their annual accounting reports to shift premiums (losses) to more (less) favorably taxed states.

Suggested Citation

Petroni, Kathy Ruby and Shackelford, Douglas A., Managing Annual Accounting Reports to Avoid State Taxes: An Analysis of Property-Casualty Insurers (June 1998). NBER Working Paper No. w6590. Available at SSRN: https://ssrn.com/abstract=226314

Kathy Ruby Petroni (Contact Author)

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States
517-432-2924 (Phone)
517-432-1101 (Fax)

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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