The Impact of State Taxes on Self-Insurance

39 Pages Posted: 19 Jun 2000 Last revised: 15 May 2022

See all articles by Bin Ke

Bin Ke

National University of Singapore; Independent

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)

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Date Written: December 1999

Abstract

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.

Suggested Citation

Ke, Bin and Petroni, Kathy Ruby and Shackelford, Douglas A., The Impact of State Taxes on Self-Insurance (December 1999). NBER Working Paper No. w7453, Available at SSRN: https://ssrn.com/abstract=227592

Bin Ke (Contact Author)

National University of Singapore ( email )

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Kathy Ruby Petroni

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

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Douglas A. Shackelford

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

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