Insurance tax rollback unlikely

Feb. 18--The last component of Owensboro's plan to reverse deficit spending and begin restoring lost reserves over a five-year period will likely go into effect this summer.

City commissioners hoping to roll back a 2 percent increase on insurance premium license fees before the July 1 implementation date now say the added stress of pension hikes and only modest tax revenue have halted those discussions for now.

Even if city coffers could go without that final tax stimulus, officials would need to notify the state of their intentions to reverse it by March 23, giving staff little time to draft an ordinance and the commission even less time to approve it.

"We need that revenue," said Angela Hamric, finance and support services director for the city of Owensboro. "There's no getting around it."

Insurance premium license fees are taxes local governments impose on insurance companies at a premium rate their customers pay for policies. More than 350 cities and 35 counties currently levy the tax, according to the Insurance Institute of Kentucky, or IIK.

Hamric said most, if not all, insurance companies pass the tax burden directly back to their customers, and state law requires them to make note of that on premium notices.

Owensboro and Daviess County residents are all too aware of the effect the IPLF can have on pocketbooks. When both local governments partnered to reinvest in the city's aging downtown infrastructure in 2009, they relied on unpopular 4 percent hikes in the fee to pay debt interest on $80 million bonds.

The 2009 ordinance earmarked money the city collected as part of that 4 percent increment directly to servicing those 30-year bonds. So, in fact, Hamric said, the general fund still only draws the original 4 percent rate.

Last year, as part of a plan to restore the city's dwindling reserves, the city commission approved raising the IPLF again to 10 percent in addition to occupational and net profit increases and compensating property tax rates.

Both the 2009 and 2017 rounds of tax hikes exempted qualifying health plans, a detail that Hamric said illustrated the fickle nature of the tax itself.

"Our original ordinance had included health plans in the 4 percent increase," she said. "But the county exempted theirs, so I think the heat was on for our city commission to do the same."

That "peer pressure," as Hamric put it, amounted to an 18 percent cut in revenue when compared to the city's original estimates.

In 2016, the city noticed another drop in IPLF revenue, and an internal audit revealed that a single, large life insurance policy that had been taken out the year before had resulted in the loss of $100,000, simply because life insurance policies alone can only be taxed once.

"We do not have the staff or time to go through every single policy, and I'm not even sure we would know even if we did, because I had to make phone calls to the insurance company and the (Kentucky) Department of Insurance," she said. "I really had to do some digging to find out what that was."

City and county governments have an enormous amount of control over premium tax rates and minimums, said IIK Executive Director Mark Treesh.

Treesh, a former state representative for Kentucky's 14th District in Daviess and Ohio counties, said that control is exactly why the city must inform the DOI of its tax schedule by March 23 -- to give it enough time to publish those details for the benefit of insurance companies doing business in the state.

The General Assembly passed a law in 2008 aimed at helping smooth the process of communication between policyholders, local governments and companies that had come to a boiling point over lawsuits, false claims and more, he said.

House Bill 524 required insurers to give their customers notice about the tax with information that included the jurisdiction for which the tax was assessed. The idea, he said was to give policyholders the opportunity to identify errors more easily. The law also mandated risk location technology to verify exactly where a customer lives and what jurisdiction has tax authority over his or her policy.

"If I live in one city with a 10 percent insurance premium tax but the county only collects 5 percent or even no tax at all," Treesh said, "we need to be sure exactly where you live and what jurisdiction has the authority to tax -- for their sake and yours."

But the law, he said, could have gone further. Kentucky, he said, is the only state in the nation that doesn't have some form of centralized collection, whereby insurance companies would pay the state and the state would allocate those dollars to the local governments themselves.

Of course, he said, he understands how unpopular such a notion might be.

"It was a nonstarter for local governments in 2008, and I believe it would be nonstarter for them now, too," he said.

The only way to centralize local government collections, he mused, would be to include it in broader tax reform legislation that gave governments something to bank on like add-on sales tax or expanded home rule.

That's what Owensboro Mayor Tom Watson has been lobbying for since he took office in 2016. He's been in Frankfort as recently as this month trying to convince lawmakers to see what burden remains on local governments that are constrained on what kind of and how much tax revenue they can collect.

THe IPLF, he said, is just another part of that effort.

"It's another piece to the puzzle that we were trying to put together to put the least amount of taxes we could possibly do and try to get participation from everybody," he said.

When the city proposed the 2 percent hike last year, Mayor Pro Tem Bob Glenn and Commissioner Pam Smith-Wright were vocal opponents. They both said they wanted to try to roll the tax back before it took effect this summer.

Last week, Glenn said his position hasn't changed. He understands that insurance premiums do give consumers more control, since they can raise their deductibles to lower premiums, but insurance taxes often hit those lower-income individuals without a stable paycheck.

"You may be retired so the occupational license fee means little to you," he said. "But if you own a car, you're paying those monthly payments and they're just getting higher and higher."

If lawmakers in Frankfort were to approve the county-level pension recommendation they have before them now, the city could face up to $2.9 million more in liability. That's almost a 50 percent increase for cities like Owensboro.

Smith-Wright said its hard to prepare a budget for the next fiscal year when there remains so much doubt about what the city's bill might be.

"No matter which way you look at it, it doesn't look like you can stop that insurance tax before it takes effect," she said. "But it's not over until it's over. What I can say is that I don't want to entertain another tax increase again."

Austin Ramsey, 270-691-7302, aramsey@messenger-inquirer.com, Twitter: @austinrramsey

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