HOPKINS COUNTY, KY – The Insurance Premium Tax is already a hot topic in the Hopkins County Magisterial Races and City races.  There continues to be fall out over financing the Hopkins County Detention Center with bonds guaranteed by the Insurance Premium Tax.  The tax was originally created by the General Assembly to provide local governments with taxing authority to provide improved fire and police protection.  The thinking of the legislators was that by improving fire and police protection, insurance rates for homeowners and businesses would drop by more than the tax placed on the insurance; thus creating a win – win situation.

However, there are some unique parts to the insurance premium tax.  The first is that the tax is considered part of your insurance premium and therefore the tax portion is not deductible on your state or federal income tax.  (For businesses, it is deductible because insurance is an expense of operating a business.)  The Insurance premium tax is a “pyramid tax” because you pay taxes on taxes on taxes.  First you pay taxes on your income that is deducted from your pay check, taxes like social security, Medicare, occupational taxes, state income tax, federal income tax, etc. 

The second part of the tax that is unique is: that the State of Kentucky allows a 15% surcharge to collect the tax.  In other words, for each dollar of tax you owe, the insurance company gets another $.15.  This applies for businesses as well.  The only insurance that is exempted is health insurance and workers compensation insurance.

Let’s look at an example: You pay your insurance premium; and, in Hopkins County, you pay another 11.5% tax.  For a premium charge of $1,000 you will pay another $100 in insurance premium tax plus another $15 to the insurance company to collect and report the tax - for a grand total of $1,115.00. 

However, it gets worse.  When you calculate how much money you must earn to pay that $100 that the city or county gets, it is very interesting.  That amount you have to earn (gross earnings) to pay the $100 tax varies widely depending on the source of your income and your state and federal tax bracket.  For those working in Madisonville in the 15% federal tax bracket, you have to earn $164.64 to pay $100 in taxes to the city or county through the insurance premium tax (and $2.47 of the $64.64 is Madisonville Occupational taxes).  If you are in the top federal tax bracket, you must earn a whopping $230.69 to pay the city or county $100.

Certainly government must have revenues to provide the legitimate services we desire.  Each of us has a different view of what “legitimate services” would encompass and paying for it also creates conflicts.  Getting rid of the insurance premium tax is a no-brainer.  Deciding which tax to replace it brings on the debate.

You can see for yourself in the following examples:

It would be interesting to know the position of those asking for our votes this election year concerning Insurance Premium Tax.

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Ron Sanders
iSurf News