The Effect of Taxes on the Location of Property-Casualty Insurance Firms

Abstract

States levy insurance premium taxes, which are essentially gross receipt taxes on premiums. A very unusual characteristic of insurance premium taxes is that in each state in which an insurance company writes premiums, the firm pays the higher of the tax rate in the state in which the company is domiciled and the state in which the policy is written. Thus, the choice of location has a significant effect on the firm’s tax liability. Using firm-level data for the property-casualty (P-C) insurance industry, we calculate the firm-specific tax rate for each P-C firm for every possible state of domicile. We estimate a conditional logistic model to analyze the effect of these insurance premium taxes on the choice of the state of domicile of existing and relocated firms. We find robust evidence of a small, negative, and statistically significant effect of the insurance premiums tax rate on the choice of the state of domicile.

Keywords: Taxes, Insurance Firms, Firm Location, Conditional Logit Model

JEL Classification: G2, H7, L84, R11