Question

State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a?

Answer 1

Retaliatory taxation is the practice where State X imposes the same higher premium tax rate on insurers from State Y that is required by State Y on State X's insurers, even if State X's own rate is lower.

Step-by-step explanation:

The practice described, where State X requires insurers from State Y to pay a higher premium tax rate in State X (3 percent) even though State X's own premium tax rate is lower at 2 percent, is referred to as retaliatory taxation.

Retaliatory tax is a method used by states to protect their domestic insurance companies from less favorable tax treatment in other states by imposing equal tax burdens on out-of-state companies seeking to do business within their borders.

Both State X's and State Y's insurers face a 3 percent premium tax rate when they conduct business in each other's state, despite their own state's lower tax rate. This approach aims to create a level playing field and discourage states from imposing excessively high taxes on out-of-state insurers; however, it can also lead to complications in the insurance market.