The insurance industry views premium taxes as an inevitable liability that accrues regardless of a company’s profits or operating results. For insurers[i] with Georgia premium or surplus lines tax liabilities, there are multiple ways to reduce tax liability by investing minimum amounts of assets in Georgia and the purchase of premium tax credits.
Georgia has one of the highest combined premium tax rates for property and casualty insurers[ii] in the country. The premium tax payable to the State is 2.25% of premiums[iii] plus an additional 2.50% of premiums[iv] payable for county and municipal taxes, making a combined rate of 4.75%. In fact, premium taxes make up the third highest source of non-enterprise[v] revenue for municipalities in Georgia, behind property and sales taxes.[vi]
Fortunately for insurers in Georgia, there are a number of ways to lower their premium taxes through investing in Georgia sitused assets (which lowers the tax rate), purchasing tax credits (which directly offset premium taxes due), investing in clean energy in Georgia, and creating jobs in certain areas of the State. Each option is discussed in more detail below.
Any insurance company writing premiums in Georgia is eligible for an abatement of the State portion of the premium tax.[vii] An Insurer can lower the State premium tax rate to 0.50% by investing at least 75% of its eligible assets[viii] (or 1.25% by investing at least 25% of its eligible assets) in the following assets:
(1) General obligation bonds of this State or of any political subdivision of the State of Georgia;
(2) Revenue bonds or revenue anticipation certificates of any county, municipality, or political subdivision of this State;
(3) Revenue bonds or revenue anticipation certificates of any authority or public corporation created by or pursuant to the laws of this State;
(4) Real estate situated in and subject to taxation by this State or its political subdivisions;
(5) Tangible personal property located in this State and subject to taxation by this State or its political subdivisions;
(6) Loans secured by liens on real estate situated in this State;
(7) Policy loans on insurance policies issued by the company on lives of persons resident in this State;
(8) Intangible property having a taxable situs in this State; or
(9) Shares in Georgia corporations in which the insurance companies are authorized to invest under the laws of this State.[ix]
The majority of the above assets are clearly defined; however, what constitutes intangible property having a taxable situs in Georgia is subject to substantial interpretation. Intangible assets generally are deemed to be located where an entity is domiciled or maintains its principal place of business.
For example, Georgia’s Attorney General issued an opinion that all of the intangible assets of a foreign insurer who has its principal place of business and administrative offices in Georgia are deemed to have a taxable situs in Georgia for purposes of the abatement.[x] Georgia domestic insurers are required to have and maintain their principal place of business in Georgia,[xi] so the pool of insurers that may easily qualify for the abatement based on their intangible assets is potentially expansive.[xii]
Insurers claim the abatement by filing Form GID-014-PT with their annual premium tax return. Form GID-014-PT requires insurers to show their calculation of Georgia sitused assets and attach a detailed list of the assets claimed in support of the abatement. The abatement amount then is transferred to the annual return on Form GID-012-PT and reduces the effective premium tax rate down to the abated percentage.
Premium Tax Credits
Premium tax credits equate to a dollar-for-dollar reduction in premium tax due and were created by the Georgia Legislature to reward certain investments in Georgia. Georgia currently has three premium tax credits for investments in low-income housing,[xiii] clean energy,[xiv] and creating new jobs in Georgia.[xv] This section focuses on low-income housing tax credits (“LIHTCs”) because these credits are the most widely available of the three credits and the only ones that apply to risk retention groups and surplus lines brokers in addition to insurance companies. The other credits are discussed only in summary and generally not available for purchase, but must be developed directly by an insurer.
Pursuant to the Tax Reform Act of 1986, federal low-income tax housing tax credits (“Federal Credits”) were authorized under Section 42 of the Internal Revenue Code (the “IRC”). Subsequently, several states, including Georgia in 2001, enacted a parallel incentive authorizing state low-income housing tax credits (such tax credits in Georgia referred to as the “Georgia Credits”). Federal Credits and Georgia Credits encourage private business to provide a source of funding for certain affordable housing projects (referred to as “Affordable Housing Projects”).
To generate Federal and Georgia Credits, the Affordable Housing Project must be operated and maintained in accordance with prescribed rules under Section 42 of the IRC. Under Section 42 of the IRC, Federal Credits are available with respect to “qualified low-income residential properties;” that is, residential rental properties in which (a) 20% or more of the aggregate residential rental units are occupied by tenants with incomes of 50% or less of area median income, as adjusted for family size, or (b) 40% or more of the aggregate residential rental units are occupied by tenants with incomes of 60% or less of area median income, as adjusted for family size (each test being the “Minimum Set-Aside Test” which must be satisfied). Additionally, the gross rent charged to tenants of units comprising the Minimum Set-Aside cannot exceed 30% of the applicable Set-Aside income (i.e., 50% or 60% of area median income) for a family of a specified size. Georgia Credits are allowed for projects placed in service after January 1, 2001 which qualify for Federal Credits.
Federal Credits and Georgia Credits are generated during the first ten years of an Affordable Housing Project’s operation. However, the Affordable Housing Project must comply with the rules set forth in Section 42 of the IRC for the first 15 years of its operation; otherwise some of the credits are subject to recapture. The Georgia Department of Community Affairs administers the Georgia Credit program subject to rulings from the Georgia Departments of Revenue and Insurance.
How Georgia Credits Work
A robust secondary market for Georgia Credits has developed, and insurers can obtain credits from a number of participants in the tax credit industry, ranging from large financial institutions to specialized tax credit funds to developers. Under Section 42 of the IRC, Federal Credits are available to the owners of Affordable Housing Projects. Typically, an entity taxed as a partnership for income tax purposes (the “Project Partnership”) will own the Affordable Housing Project. An affiliate of the developer will serve as the general partner of the Project Partnership, and tax credit investors are admitted as the limited partners - which may include a separate limited partner for the Federal Credits and a separate limited partner for the Georgia Credits.
In exchange for a capital contribution to the Project Partnership, the limited partners are entitled to a share of the Project Partnership’s cash distributions as well as an allocation of a specified portion of the Project Partnership’s tax attributes, including the Federal Credits and/or the Georgia Credits. Georgia Credits may be allocated among some or all of the partners of the Project Partnership in any manner agreed to by such persons. This is true even if a partner is not allocated or allowed any portion of the Federal Credits available to the Project Partnership. The limited partnership agreement of the Project Partnership will specifically provide an allocation of the Georgia Credits among the partnership’s partners as agreed to by them.
The investments also are considered to be Georgia sitused investments for purposes of calculating Georgia’s premium tax abatement for companies that invest assets in the State.[xvi]
Economics - Reducing Effective Premium Tax Rate
Generally, the capital contribution made by an insurer to a Project Partnership is based on a discount vis-à-vis the total amount of the Georgia Credits to be allocated to the insurer. The discounting creates a positive rate of return on funds which would otherwise be paid as taxes. Georgia Credits normally are delivered in the first quarter for the previous tax year. As mentioned, the Georgia Credits offset premium and surplus lines taxes dollar for dollar. For example, $100 of Georgia Credits will offset $100 of Georgia premium or surplus lines taxes due. Any unused Georgia Credits may be carried forward for up to three years but cannot be applied to previously-filed returns.
There is a risk the Georgia Credits could be recaptured if the underlying property no longer qualifies for the Federal Credits. To guard against that risk, the general partner (and its principals) of the Project Partnership may provide a guaranty to the limited partner in the event that the amount of Georgia Credits allocated to the insurer is less than projected. A market for insurance coverage against recapture is beginning to form. In the event of recapture, the insurance policy would pay the economic value of the lost credits.
Of course, before investing in any partnerships that generate LIHTCs, insurers should consult with their tax and legal advisors.
Clean Energy Tax Credits
In 2008, Georgia enacted an incentive creating tax credits for energy efficient and renewable energy projects.[xvii] An insurance company may apply the credit against its premium tax obligations.[xviii] Clean energy property includes solar energy equipment, geothermal heat pump systems, lighting retrofit projects, energy efficient buildings, wind equipment, and biomass conversion equipment.[xix]
To receive the credit, an insurance company must first install the clean energy property and submit a pre-approval application to the Georgia Environmental Finance Authority (GEFA).[xx] Once GEFA pre-approval is received, the insurer must complete an IT-CEP-AP Form and submit it to the Georgia Department of Revenue.[xxi]
As of 2012, any credit must be taken in four equal installments over four successive tax years beginning with the year in which the credit is allowed.[xxii] The program is subject to an annual cap of $5 million,[xxiii] and credits are approved on a first come, first served basis.[xxiv] If a taxpayer does not receive a credit during one tax year, then the taxpayer is added to a priority list to receive the credit in subsequent years.[xxv] Originally subject to sunset in 2012, the incentive has been extended through 2014.
Georgia Job Tax Credit
Also in 2008, the Georgia legislature made available to insurance companies a job tax credit.[xxvi] The credit encourages business development in less-developed regions in the State.[xxvii] To be eligible to receive the credit, a minimum number of new, full-time jobs must be created, the average wage of which must be greater than the average wage of the county in Georgia with the lowest average wage, and the insurance company must make health insurance coverage available to the new employees.[xxviii]
The minimum required number of new jobs created and the amount of the credit received depend on the county in which the jobs are created. Georgia’s counties are ranked[xxix] by the Commissioner of the Department of Community Affairs and divided into four tiers with tier 1 being the least developed counties and tier 4 being the most developed counties.[xxx] In a tier 1 county, at least five new jobs must be created, and the insurer is allowed a yearly credit of $3,500 per job for five years.[xxxi] For a tier 2 county, at least ten new jobs must be created, and the insurer is allowed a yearly credit of $2,500 per job for five years. For tier 3 counties, at least fifteen new jobs must be created, and the insurer is allowed a yearly credit of $1,250 per job for five years. An insurer must create at least twenty-five new jobs in a tier 4 county and is allowed a yearly credit of $750 per job for five years. No credit is allowed during a year if the net employment increase falls below the number required by the respective tier; however, any credits received in previous years will not be affected.[xxxii]
Insurance companies that have operated a facility in Georgia for the preceding three years are allowed an additional $500 credit for each eligible new job for one year after the creation of the job, with the credit claimed in year two after the creation of the job; however, this additional credit is only available for jobs created through January 1, 2014.[xxxiii]
Though Georgia has one of the highest combined premium tax rates in the country, it offers some of the most favorable state tax benefits for insurance companies.[xxxiv] Insurers can lower their tax liability by using one or more of the discussed benefits: tax abatement, LIHTC credits, clean energy credits, and job tax credits.
Insurers wishing to take full advantage of the Georgia tax benefits should consider investing in Georgia property in order to be eligible for tax abatement and purchasing LIHTC credits on Georgia’s active secondary market. Insurers that are growing or expanding should consider positioning new operations in low-income counties and installing clean energy projects when possible.
[i] Risk retention groups and surplus lines brokers can also take advantage of certain tax credits. The use of credits by surplus lines brokers requires special considerations that are beyond the scope of this article. For example, while Georgia Credits are available to offset surplus lines tax, the surplus lines broker arguably must purchase the Georgia Credits individually since the surplus lines tax is paid by the broker.
[ii] This article focuses on property and casualty insurers because Georgia law permits life and health insurers to deduct county and municipal taxes from their state premium taxes. Property and casualty insurers are more focused on lowering their tax liability, thus effectively lowering their combined tax rate to the State rate of 2.25%. See Ga. Code Ann. § 33-8-8.1(f). Life and health insurers can, however, lower their premium taxes by taking advantage of the options discussed herein.
[iii] See Ga. Code Ann. § 33-8-8.2.
[iv] See Ga. Code Ann. § 33-8-4.
[v] Enterprise sources of revenue are such things as charges for municipal water and service, gas, and electric services.
[vi] Georgia Municipal Association, Handbook for Georgia Mayors and Councilmembers part 5, 1 (5th ed. 2012)
[vii] See Ga. Code Ann. § 33-8-5.
[viii] Insurers exclude direct obligations of the U.S. Government, accrued interest, and deferred premiums from the calculation. See Ga. Code Ann. § 33-8-5 and Form GID-014-PT.
[ix] See Ga. Code Ann. § 33-8-8.5.
[x] See 1982 Op. Att’y Gen. No. 82-22.
[xi] See Ga. Code Ann. § 33-14-13.
[xii] According to data from A.M. Best, there are 36 L&H and 60 P&C domestic insurers in Georgia and 42 L&H and 96 P&C foreign insurers with their administrative office in Georgia.
[xiii] See Ga. Code Ann. § 33-1-18.
[xiv] See Ga. Code Ann. § 48-7-29.14.
[xv] See Ga. Code Ann. § 33-8-4.1.
[xvi] See Ga. Code Ann. § 33-8-5.
[xvii] Georgia Clean Energy Property Tax Credit, Georgia Environmental Finance Authority,available at http://www.gefa.org/index.aspx?page=423.
[xviii] See Ga. Code Ann. § 48-7-29.14(b)(1).
[xix] See Ga. Code Ann. § 48-7-29.14(3).
[xx] Georgia Clean Energy Property Tax Credit Application Preapplication, Georgia Environmental Finance Authority, available athttps://georgiaenvironmentalfinanceauthority.quickbase.com/db/bfc7w298e?a=GenNewRecord.
[xxi] Clean Energy Property Tax Credit, Georgia Department of Revenue, available athttps://etax.dor.ga.gov/inctax/taxcredits/Form_IT-CEP2012_Clean_Energy_Credit_Calculation_Form.pdf.
[xxii] See Ga. Code Ann. § 48-7-29.14(b)(1)(A).
[xxiii] See Ga. Code Ann. § 48-7-29.14(b)(3).
[xxiv] See Ga. Code Ann. § 48-7-29.14(b)(4)(B).
[xxv] See Ga. Code Ann. § 48-7-29.14(b)(4).
[xxvi] See Ga. Code Ann. § 33-8-4.1.
[xxvii] Karen Kelly & Sonja Parker, Incentives Available for, and Some Aimed at, the Insurance Industry, J. Multistate Tax’n and Incentives, Nov.-Dec. 2012, at 28, 35.
[xxviii] The insurer is not required to pay for employee health coverage unless the insurer pays for health coverage of other employees. Ga. Code Ann. § 33-8-4.1(f)(1).
[xxix] Factors used to rank the counties are unemployment rate, per capita income, and percentage of residents below the poverty line. Ga. Code Ann. § 33-8-4.1(b)(1).
[xxx] Tier 1 includes the 71 least developed counties; tier 2 includes the 72 through 106 least developed counties; tier 3 includes the 107 through 141 least developed counties; and tier 4 includes the 142 through 159 least developed counties. See Ga. Code Ann. § 33-8-4.1(b)(2). A map classifying the counties is available at http://bit.ly/15rrscY.
[xxxi] A $500 per job credit is available from a Joint Development Authority. Note that the $500 credit is not available in Webster County.
[xxxii] See Ga. Code Ann. § 33-8-4.1(f)(1).
[xxxiii] See Ga. Code Ann. § 33-8-4.1(f)(2).
[xxxiv] See, Kelly & Parker, supra note 29 (outlining different state insurance taxation regimes).