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Policy
Matters
T HE J OSIAH
BARTLETT
CENTER
FOR
PUBLIC
POLICY
Celebrating over a Decade of Public Policy –Through the Power of Ideas
January 2006
A
confluence of factors, in particular a cut in the Insurance
Premium Tax, would present New Hampshire with a unique
MAKING NEW
opportunity to create jobs and emerge as a regional center for
HAMPSHIRE A
the financial services industry. Acting immediately to reduce the nominal
REGIONAL CENTER rate of the insurance tax will stop the exodus of insurance companies
from New Hampshire, bring new companies and jobs to the state, and
FOR FINANCIAL
add to New Hampshire’s growing reputation as an attractive location for
SERVICES BY
the financial services industry.
CUTTING THE
INSURANCE
PREMIUM TAX
By Charles M. Arlinghaus
“Acting immediately to
Insurance companies from New Hampshire and from other states
continue to relocate in states with lower insurance taxes. Cutting the
insurance premium tax by one point would give New Hampshire the
lowest tax rates in the Northeast. Instead of continuing to lose insurance
companies and jobs, a rate cut would add between 2700 and 3400 jobs
with an economic impact of $100- $125 million. Furthermore, given the
unique nature of the insurance tax and its reciprocal provisions, even a
one-point rate cut would increase state revenues over the previous year.
*
reduce the nominal rate of the
insurance tax will stop the
exodus of insurance
companies from New
Hampshire, bring new
companies and jobs to the
state, and add to New
Hampshire’s growing
reputation as an attractive
location for the financial
services industry.”
*
*
*
Government tax policy does much more than just create a tax
collecting schedule. Differing levels of taxation create economic
incentives and disincentives. Tax rates and incentives are monitored by
businesses and used to make decisions that affect a company’s
profitability, its incentive to invest and create jobs in different parts of a
business, and decisions to expand or relocate jobs.
New Hampshire makes tax policy decisions taking into account
the tax policy of neighboring states and the competitive advantages we
might create for our economy. Some tax decisions will create
disincentives that hurt our economy while others attract economic
activity and bring companies and jobs to the state for the benefit of our
citizens and the state’s future.
In a relatively small state like New Hampshire, it is particularly
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important that tax policy track the disincentives driving people away and keep track of potential
changes that can reverse those trends or create a competitive advantage that will have lasting impacts.
In the 1960s, business tax policy had created an incentive to move activity and jobs out of the
state and created strong disincentives for starting a company inside New Hampshire. Our tax system
levied a series of taxes on stock, machinery, and other capital investments. As a result, a company that
carried stock in trade or required machinery and other capital investment would have a significant
economic incentive to locate just over the border outside New Hampshire. Any company requiring
capital investment would see a heavy tax on that investment whether they earned a profit or not. It
created a strong disincentive to entrepreneurial investment that required investment before
profitability. Responding to a tax policy that moved jobs away and kept it from attracting new jobs that
would otherwise find New Hampshire attractive, state government repealed a series of 12 taxes and
replaced them with a business profits tax. This allowed a company to invest and startup without the
government smothering it until it was running and profitable. The change made New Hampshire much
more attractive to new or relocating businesses and turned New Hampshire into the economic leader
of New England.
Just as the reforms that led to the business profits tax created the modern New Hampshire
economy, today we are presented with a similar opportunity to move New Hampshire forward and
make us a leader in the new economy – this time in the expanding financial services sector.
In a report on the 21st Century Economy done a few years ago for Network NH, Polecon
Research identified the financial services industry as one of the key components of New Hampshire’s
new economy.1 The financial services sector promises to be one of the faster growing sectors of the
economy, offers both high wage jobs and entry level training jobs, takes advantage of New
Hampshire’s natural advantages, and is quite friendly to our environment and infrastructure. The strong
presence of industry leaders is both beneficial and a good sign to other companies considering New
Hampshire. For example, internationally-known Fidelity Investments has gone from a small presence
to becoming one of the state’s largest employers. This is a strong statement for related industries we
can interest in taking a look at New Hampshire.
The insurance industry is taxed with an insurance premium tax assessed at the nominal rate of
2%. However, every state including New Hampshire has a system of “retaliatory taxes” under which a
company pays a premium tax on policies written in a state at either the state’s nominal tax rate or a
higher rate if a company’s home state is higher. This creates a significant incentive for a company to
“domicile” in a low tax state.
In recent years, New Hampshire has seen four local companies move their headquarters and
jobs to other states. Three of them took advantage of greener pastures in low tax states and moved to
Nebraska and South Carolina with rates of 1% and 1.25%. The fourth just moved across the border to
Massachusetts whose rate is similar to ours. Across the country, the greatest number of
“redomestications” in recent years has been to Ohio which reduced its tax rate to 1.4%.2 Without a rate
reduction, New Hampshire will continue to see companies and jobs leaving the state for lower tax
destinations.
New Hampshire is well situated to be a lower tax island in the higher tax Northeast as it is in so
“The Financial Services Industry in New Hampshire’s New Economy,” Network NH, February 2001. The
report details the importance of a thriving financial services sector to the economy as a whole and the
opportunities it presents to New Hampshire’s future.
2See “Economic and Fiscal Impacts of Reducing the New Hampshire Insurance Premium Tax Rate.” Produced
for The New Hampshire Insurance Department by Ernst & Young, February 15, 2005.
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many other areas. The other New England states also have 2% premium tax rates with Massachusetts a
bit higher at 2.25%. Connecticut has attracted jobs with the slightly lower rate of 1.75%.
By reducing its rate to 1 %, New Hampshire’s rate would be dramatically lower than that of
other states in the region. Because New Hampshire already has a strong business-friendly reputation,
the reduction to 1% could create critical mass to make us a haven for financial service jobs in the
insurance industry. We already have a strong nucleus in other areas (like the Fidelity Investments center
for example) that sends a good signal to other businesses.
A study prepared for the New Hampshire Department of Insurance by the national firm Ernst
& Young found that reducing the premium tax rate would add 1640 jobs and $61 million to the
economy3. The study is based on a similar analysis Ernst & Young prepared for Iowa which is lowering
its premium tax rate4.
However, the Ernst & Young job growth estimates may be too cautious. They estimate direct
employment in the insurance industry would grow by 750 jobs helping to create an additional 891 jobs
in the rest of the economy because of the “multiplier effect” of increased economic activity. The
Network NH study by Polecon Research looked back at jobs created from 1992-99 and their multiplier
effect. That study found that 2685 jobs created in the financial services sector had helped to create a
total of 7324 jobs. That research suggests that the impact of 750 direct insurance jobs would be more
likely to create a total of 2045 jobs not 1640 and an economic impact of $75 million not $61 million.
Furthermore, the Ernst & Young study is probably too cautious in its estimate of the insurance
jobs likely to come to New Hampshire. Their Iowa revenue projections have proven to be right on
track after the first year’s results. But Iowa is trying to keep pace with bordering Nebraska already at
1% and so will have somewhat muted effects. New Hampshire, in contrast, would have no such
regional competition and therefore has a strong likelihood of seeing greater growth than an initial 750
jobs. If direct employment increased by 1000-1250 jobs instead of 750, total employment growth
would be 2720 – 3415 jobs with an economic impact of $100 - $125 million.
For state budget writers, any economic impacts must be considered along budget impacts as
well. Because of its unique nature – a nominal tax rate and retaliatory provisions – a cut in the nominal
insurance tax rate does not lead to proportional revenue losses. The report prepared for the insurance
department estimates the static revenue loss would be less than the annual revenue growth. In other
words, insurance premium tax revenues would still grow but by a smaller amount.
We’ve already seen that the Ernst & Young estimates are overly cautious. However, even their
cautious estimate suggests a rate cut to 1% will impact state revenues by less than the average annual
growth of insurance revenues. Insurance premium taxes have grown by an average of 8% over the last
5 years -- $7 million in 2005 terms.5 Under Ernst & Young’s somewhat pessimistic assumptions, state
revenues would see a static reduction of $4.6 million. That is to say, revenues would increase by $3
The study found direct employment in the insurance would grow by 750 jobs with another 861 jobs in the rest
of the economy. The Network NH study by Polecon Research found that 2685 jobs created in the financial
services sector had resulted in a total of 7324 jobs. That suggests that 750 insurance jobs would be more likely to
create a total of 2000 or so jobs not 1600.
4 See “Economic and Fiscal Impacts of Reducing the Iowa Property and casualty Insurance Premium Tax Rate”
by Ernst & Young’s Quantitative Economics and Statistics Group.
5 The increases in insurance premium taxes have covered a range from as low as 2.5% to as high as 14.4% in the
last five years. For comparison, the FY 2006 revenue plan calls for a $4.2 million increase over 2005 levels. After
6 months, insurance tax revenues were $1.3 million ahead of that projection, on pace for a $6.8 million total
increase.
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million instead of $7 million.
Specifically, the Ernst & Young model finds that a static revenue loss of $7.075 million offset
by increased state tax collections of $2.443 million for a net state fiscal impact of $4.632 million. What
the analysis does not take into account is the impact of continued job losses as other states reduce tax
rates and more jobs continue to leave New Hampshire.
To do nothing would be to accept continuing job losses. Ernst & Young projects a loss of at
least 100 insurance jobs if no change is made. The choice, therefore, is between a continuing loss of
good financial service jobs and the economic activity that goes along with them and not just stopping a
slow exodus of jobs but seizing an opportunity and attracting thousands of jobs in an important part of
the new economy.
As the economy changes, New Hampshire must position itself to have a competitive advantage
in growing economic sectors that will create opportunity for our workers and strength for our
economy. As financial services will be an important part of the 21st Century economy, we must take
advantage of an opportunity that presents itself.
In summary, a cut in the insurance premium tax could position
New Hampshire as a regional center in the fast growing financial
services industry, create thousands of new jobs, and inject as much as
$100 million into the economy in exchange for a small reduction in the
growth of insurance tax revenues. Rarely in public policy decisions is a
cost-benefit analysis so lopsided in favor of benefits.
New Hampshire policymakers should act quickly to take
advantage of an opportunity to leverage the natural advantages of New
Hampshire’s citizenry and tax structure. Doing so will do more than
promote a short term gain. It will have lasting benefits to our state’s
long term future and the long term strength of our economy.
Charles M. Arlinghaus is the President of The Josiah Bartlett Center for Public
Policy. Feel free to contact us at 7 South State Street, Concord, NH 03301, 603-2244450 fax: 603-224-4329, [email protected] or visit our website at
http://www.jbartlett.org.
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Mission
The Josiah Bartlett Center for
Public Policy is a non-profit,
non-partisan, independent think
tank focused on state and local
public policy issues that affect
the quality of life for New
Hampshire’s citizens. The
Center has as its core beliefs
individual freedom and
responsibility, limited and
accountable government, and an
appreciation of the role of the
free enterprise system. The
Center seeks to promote policy
that supports these beliefs by
providing information, research
and analysis.
Nothing in Policy Matters should
be construed as an attempt to
aid or hinder the passage of any
legislation, or as an endorsement
of any candidate.
The Josiah Bartlett Center for
Public Policy relies on the
contributions from individuals,
businesses and foundations.