Calif. DOI’s Retroactive Tax Bad for Workers, Business, Alliance Says

December 18, 2002

The Alliance of American Insurers urged the California Board of Equalization (BOE) to overrule the state Department of Insurance’s (DOI) efforts to impose a retroactive premium tax upon companies writing workers’ compensation in the state. To do so could further weaken the already ailing workers’ comp system in California and could drive some companies to stop writing workers compensation altogether, the Alliance told the board members in a Dec. 12 letter.

The BOE will take up the issue Dec. 18, in the matter titled Appeal of Wausau Companies.

“We feel strongly that neither California law nor existing regulations support the DOI’s action,” said Lamar Whitman, Alliance director of federal and state taxation. “Certainly, the California Legislature has not enacted any statute that would support the retroactive taxation of workers’ compensation deductibles nor is the DOI’s action predicated upon an interpretation of an explicit tax statute. Common sense tells us that deductibles are not premiums.”

Without notice and hearing, the DOI issued a directive in February stating that, retroactively, all “deductible amounts” received by insurance carriers from insured employers will be treated as “gross premiums” subject to a 2.35-percent tax rate. The DOI also required that these amounts be reported on the 2001 tax return due April 1, 2002, and stated that proposed assessments would be issued for tax years 1997 through 2000.

“The Alliance strongly opposes the imposition of any retroactive tax,” Whitman said. “The Alliance believes it is economically and fiscally disruptive for any administrative agency to announce the assessment of a new tax for periods that have already ended. Incredibly, this profoundly far-reaching tax policy was not open to public debate in either the Legislature nor in any administrative hearing, but was adopted unilaterally without prior notice or public input.”

Although contrary to its own explicit policy pursued in prior years, the DOI made this action retroactive to 1997, upsetting every budget or other cost projection of both employers and insurance companies. Allowing retroactive taxation will harm businesses and make certainty in financial and business planning impossible. The new tax is certain to inhibit job growth in California.

This newly-asserted assessment could force some insurers out of business. “We are very concerned that the Department of Insurance’s tax proposal may force additional insurers into insolvency, making it even more difficult for California employers to obtain workers compensation coverage,” Whitman said.

A far-reaching policy change such as this can only be made by the California Legislature – not by the arbitrary action of the DOI, the Alliance said.

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