Transfer Insurance Tax Administration Functions to the Comptroller of Public Accounts


The state should transfer the insurance tax collection and audit functions from the Texas Department of Insurance to the Comptroller of Public Accounts.


Background
The Texas Department of Insurance (TDI) is responsible for regulating the insurance industry, licensing individuals and companies involved in the insurance industry and administering insurance fees and taxes.

There are six types of insurance taxes, surcharges and assessments which the TDI collects, administers, enforces and audits. Insurance taxes collected by TDI in fiscal 1992 totaled approximately $600 mill ion and included premium taxes, maintenance taxes, retaliatory taxes, the Office of Public Insurance Counsel assessment, the annual workers compensation surcharge, and the motor vehicle assessment. State statutes set the tax rates and fees for all taxes e xcept maintenance taxes. Maintenance tax rates are set annually by the Board of Insurance. The proceeds from maintenance taxes fund the administration of TDI.

TDI s tax administration division processes insurance tax returns. The tax administration divisi on reviews each return to ensure accuracy and compliance by manually calculating and by entering the reported information into several databases used to cross check information reported by other divisions. The processing of these tax returns is manual and should be automated. Taxes, assessments and surcharges are collected quarterly, semi-annually or annually. The tax administration division currently has 22 full-time employees and the budget amount for fiscal 1993 is $742,128, less than 2 percent of the ag ency s total budget. In fiscal 1992, TDI s tax administration division processed approximately 18,000 returns. 1

The tax administration division audits the insurance companies to ensure the amounts reported and paid are accurate. There are currently 2,558 insurance companies of which 804 are located in Texas and 1,754 are out-of-state companies. TDI s financial division annually reviews the Texas insurance companies. Therefore, the tax administration division audits mostly out-of-state companies.

TDI has seven insurance tax auditors headquartered in Austin who travel to other locations to conduct tax audits as needed. The majority of TDI s tax audits are conducted in Illinois, New York and Connecticut. In fiscal 1991, TDI performed desk reviews and field audits on 471 out-of-state companies and recovered about $6 million in insurance taxes.

In 21 states, the administration of insurance taxes is performed by the state s tax collection office. These states include some of the most populous: Florida, Georgia, Michigan, New Jersey, New York, Ohio and Pennsylvania. 3

The Comptroller of Public Accounts is responsible for collecting, administering and enforcing 26 state taxes, including regulatory taxes such as the Public Utility Commission s utility gross receipts assessments and the Texas Racing Commission s pari-mutuel wagering assessments on greyhound and horse racing.

The Comptroller s office has the resources to add the administration of the six insurance taxes to its tax administration and collection functions. In fiscal 1992, the Comptroller s office processed more than 2.8 million returns and collected more than $17.3 billion in tax and fee revenue. 4 The Comptroller has an automated collection system that processes 30,000 to 40,000 payments per day. This system includes a high-speed mail sorter, which prioritizes high-dollar returns and an automated processing system that microfilms the documents, end orses the check, reads the taxpayer information and separates the check from the return form prior to further processing. This high-tech equipment is not cost-effective for a small revenue collection effort.

Also, in fiscal 1992, the Comptroller conducted 13,453 tax audits with an average staff of 517 auditors. 5 The Comptroller s office has field audit offices in 17 Texas cities and four out-of-state offices located in Los Angeles, Chicago, New York and Tulsa. Because of the location of the Comptroller s field offices and the number of auditors available, the Comptroller s office could perform insurance company audits more efficiently. Furthermore, many insurance companies have a sales tax permit because they sell or purchase insurance services such as damage appraisals and claims processing. In these instances, the Comptroller s office could perform the insurance audits at the same time as the sales tax audits, saving auditor time and reducing disruption of the taxpayers businesses.


Recommendation
The tax administrative functions for insurance taxes should be transferred to the Comptroller of Public Accounts effective October 1, 1993.

The TDI and the Comptroller would enter into an interagency contract. The Comptroller would perform the collection, administration (including rule-making authority) and auditing of the six insurance taxes. The General Provisions of the tax code should appl y to the Comptroller s administration of these taxes. To perform this function, the Comptroller would need 15 full-time employees. The Comptroller would bill TDI for their direct and indirect cost to administer the insurance taxe s. TDI would continue to perform all regulatory and licensing functions.

The Board of Insurance would continue to set the insurance maintenance tax rates annually. The maintenance taxes would be set to cover the Comptroller s billings. The Comptroller s office and TDI would share information about the insurance companies to ens ure each agency is efficient and effective in its responsibilities. The Comptroller would have responsibility for setting rules to administer the insurance tax as it does other taxes. TDI would focus on other aspects of insurance industry regulation.


Implications
Consolidating the insurance tax administrative functions into the Comptroller s office would eliminate duplicative overhead expenses and enable the automation of the insurance tax administration function. Since the Comptroller has the equipment to automate the processing of insurance tax returns, additional equipment will not be needed. Furthermore, the faster processing of tax returns will permit a more timely transfer of i nsurance tax receipts to the General Revenue Fund. Without the insurance tax administration responsibilities, TDI can focus on its major function which is insurance regulation. The Comptroller s office would continue to focus on its core function of tax collection and auditing. Disruption of taxpayers businesses would be reduced by having only the Comptroller s staff auditing the company. Finally, the insurance companies will benefit because the processing cost of the insurance tax returns will decrease, which should reduce maintenance taxes.


Fiscal Impact
The Comptroller s office will be able to perform the insurance tax administration function more efficiently. The savings realized from this recommendation would reduce Account 36, Texas Department of Insurance Operating Account, by approximately $283,000 a nd also cut seven FTEs. For fiscal 1994, there would be a cost to design the tax systems. There would, however, be no revenue gain or loss to the state because the insurance maintenance taxes would be adjusted accordingly.



Endnotes
1 Telephone Interview with Gary Johnson, Manager of the Tax Administration Division, Texas Department of Insurance, Austin, Texas, December 30, 1992.
2 A Staff Report to the Sunset Advisory Commission, Texas Department of Insurance Office of Public Insurance Counsel (Austin, Texas, October 1992), p. 39.
3 Ibid, p. 43.
4 Telephone interview with Harold Crutsinger, Revenue Processing Division, Texas Comptroller of Public Accounts, Austin, Texas, December 29, 1992.
5 Telephone interview with Larry Ferguson, Audit Division, Texas Comptroller of Public Accounts, Austin, Texas, December 29, 1992.