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Elimination of insurance tax break could produce $40 million a year in additional revenue

The purpose of the tax credit was to incentivize insurance companies to house facilities in Alabama.

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Independent insurance agencies are urging state legislators to phase out the Alabama Insurance Offices Facilities Tax Credit. A total elimination of the tax credit, they argue, could generate over $40 million a year in additional insurance taxes, while making the insurance markets in Alabama more competitive. They argue that the incentive has failed and needs to be done away with.

The purpose of the tax credit was to incentivize insurance companies to house facilities in Alabama. Only two insurance companies own enough real estate in Alabama to qualify for the controversial tax credit. They are ALFA insurance and State Farm. While many other insurance companies have offices in Alabama; they don’t hit the threshold in real estate values necessary to claim the credit.

Only ALFA and State Farm do, though both have decreased their number of offices in recent years as insurance increasingly goes to the internet and away from your neighborhood insurance agency. State taxes on insurance premiums is one of the largest contributors to the state general fund budget as all income taxes and much of the sales tax dollars go to the education trust fund and fuel taxes go to the road and bridge fund.

Legislation to phase out the tax credit was introduced in the 2017 Legislative Session but ultimately stalled due to the efforts of legislators allied with ALFA and State Farm. According to the fiscal note on that piece of legislation, the complete elimination of the tax credit could increase revenues from the Insurance Premium Tax by an estimated $44.9 million a year.

The independent insurance agencies argue that allowing ALFA and State Farm to claim this tax credit each year allows them to charge lower insurance premium taxes, giving them a competitive advantage over other insurers who have to charge higher insurance premium taxes to their customers. This gives those two companies the ability to quote a lower premium on their insurance products simply due to the difference in the insurance premium taxes.

They accuse the Legislature of engaging in crony capitalism – picking winners in the insurance market by rigging the system in favor of their friends at ALFA.

This whole issue becomes relevant due to the worsening crisis with the Alabama state prisons.

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The Legislature is expected to be called into special session later this month to consider proposals on how to address the many problems outlined in a report by the U.S. Department of Justice.

Alabama Gov. Kay Ivey told the federal government that she had a plan to address conditions in the Alabama Department of Corrections. Ivey’s plan was to sign a lease with private consortiums to build corporate prisons. In December, the Ivey administration signed contracts with two consortiums to build three new megaprisons in Bibb, Elmore and Escambia counties.

Ivey promised the federal court and the Department of Justice that the new prisons would require fewer prison guards, be safer, easier to staff, and give the prisoners much better access to health care, job training, drug treatment, and mental health services than the 27 existing state of Alabama prisons, which have not been adequately maintained and are presently staffed by 2,000 fewer guards than necessary to protect the inmates safety. 

The governor’s plan might have worked; however, we will never know because the banks and underwriters who were supposed to finance these megaprisons have all pulled out of the plan. Since none of the consortiums were able to get the private financing to honor their part of the deal the governor’s plans, three years in the making, now appear to be dead.

That means that the governor has to turn to the Legislature. Gov. Robert Bentley had asked the legislature for a $2 billion bond issue to address the aging ADOC infrastructure, but the Legislature twice rebuffed his efforts. When Ivey was elevated to governor, she inherited Bentley’s bond issue proposal. Her attempts to get the Legislature to take seriously its responsibilities to the state’s prisoners were similarly rejected by legislators who were more concerned about their own political races or political posturing than solving actual problems. That is when Ivey decided to “go it alone.”

Meanwhile, inmates have sued the state over the conditions and a federal judge has ordered the state to hire 2,000 prison guards – an order that ADOC has been unable to comply with, even though the Legislature has appropriated the money and raised the pay of prison guards substantially.  A booming economy and a shortage of workers for all positions post-pandemic has only made it less likely that competent persons are going to choose a career with ADOC.

Former Attorney General Jeff Sessions conducted a lengthy DOJ review of the Alabama prisons and found that they were the most dangerous prisons in the entire country. Inmates being murdered, raped, beaten, and terrorized by their fellow inmates is a far too frequent occurrence in Alabama prisons. Suicides and drug overdose deaths are similarly too great of a problem.

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Former Attorney General William Barr and the Trump administration sued the state of Alabama arguing that the conditions in the Alabama prisons amount to cruel and unusual punishment under the constitution. The state has yet to seriously address the DOJ concerns and the failure of Ivey’s plan to get off the ground means that ADOC can show the DOJ and the federal courts very little progress despite making promises to the federal court and the Biden, Trump, and Obama administrations that the state was working on it and were about to implement a plan

New prison facilities and/or major upgrades to existing prisons facilities will undoubtedly be part of the legislation that the legislature will consider either in a later summer special session or early in the 2022 Legislative Session. Paying for those facilities will likely necessitate a bond issue. Funding a bond issue will likely mean finding a revenue source. The independent insurance agencies of Alabama are recommending that that revenue come through repealing those tax incentives which they claim discourage competition in Alabama insurance markets.

They argue that getting rid of the tax break would level the playing field on insurance and promote competition; while raising money for the state general fund while not imposing a new tax on the people of Alabama.

Written By

Brandon Moseley is a senior reporter with over nine years at Alabama Political Reporter. During that time he has written 8,941 articles for APR. You can email him at [email protected] or follow him on Facebook. Brandon is a native of Moody, Alabama, a graduate of Auburn University, and a seventh generation Alabamian.

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