State seeks to eliminate tax credit for auto insurers

A newly available tax credit impacts an ongoing debate in Lansing over how much auto insurers should be reimbursed for the cost of medical treatment for uninsured accident victims.

LANSING — Nearly 100 auto insurers in Michigan last year claimed a previously unavailable tax credit that is expected to cost the state $80 million in annual revenue.

Some state lawmakers now say they want to fix what they’re calling an unintended consequence of a three-year-old policy change that shifted administrative oversight of Michigan’s assigned claims plan, which covers medical expenses for people injured in crashes in which no party has auto insurance.

The issue could become a thread in a bigger debate related to reforming Michigan’s no-fault auto insurance law, which covers the assigned claims process, even as bills to update the program stall in the Legislature.

On one hand, representatives for the insurance industry say the credit compensates for the amount insurers pay each year to reimburse the Michigan Automobile Insurance Placement Facility for the cost of medical treatment it is required to cover for uninsured crash victims — costs, they say, that ultimately are passed on to Michigan policyholders as higher premiums.

Yet redemption of the tax credit will have budget implications. The new claims caught the state by surprise: It wasn’t until December that Treasury Department officials linked several months of lower-than-expected state insurance tax collections with the new incentive.

The credits were expected to cost the state’s general fund $60 million in the 2015 fiscal year, which ended Sept. 30, and $80 million annually going forward, according to treasury estimates.

News of the insurance credit surfaced last month during a state revenue estimating conference. That drop in state revenue will be one factor in the 2017 fiscal-year budget Gov. Rick Snyder is scheduled to present on Wednesday.

In all, 93 auto insurance companies claimed the new credit for the 2014 tax year, which affected the 2015 fiscal year’s revenue, state Treasury Department spokesman Terry Stanton said. He would not disclose the names of the companies or the amount of individual credits, citing privacy laws.

The 2012 law that triggered the credit moved management of the assigned claims program from the Michigan Department of State, where it had been housed since its creation in 1973, to the Michigan Automobile Insurance Placement Facility, or MAIPF, the state’s residual insurance market that assigns uninsured injury claims to participating carriers.

The facility also serves as Michigan’s insurer of last resort and writes policies for drivers who can’t buy one on the open market because of poor driving records.

Legislative fiscal analysts and some lawmakers were surprised in January when they learned of the credit, in large part because few had connected the tax code implications from the legislative changes to the state’s insurance code.

“Nobody reading the bill would have said, ‘Oh, wow, this is going to do something with the taxes. We should have the tax people look at it,’ ” said David Zin, chief economist with the Senate Fiscal Agency, which analyzes the fiscal impact of proposed legislation. “I mean, it’s a bill that just moved something from one office to another.

“The fact that this hasn’t become an issue until this year and we made the change three years ago suggests at the time (insurers) may not have known it was going to be an issue, either.”

‘Big tax reduction’

Michigan’s assigned claims program processes between 3,000 and 4,000 claims each year, said Terri Miller, executive director of MAIPF.

It covers medical care for people injured in auto accidents who don’t have insurance. That can include pedestrians hit by an uninsured or hit-and-run vehicle when the pedestrian also doesn’t have his or her own coverage, or children riding in an uninsured vehicle who are involved in a crash.

Seven private insurers handle assigned claims as they would for any other policyholder, with one notable difference — the recipient of assigned claims benefits does not pay an auto insurance premium.

The cost of that care, then, is shared among all insurance companies that write auto policies in the state through an assessment MAIPF charges. More than $238 million was charged to insurers last year, according to the Insurance Institute of Michigan.

For years, the insurance industry had pushed for legislation that would move the assigned claims program into an organization with more expertise in vetting claims. At the time, the Department of State agreed, saying it wasn’t designed to be an insurance claims adjuster, according to a House Fiscal Agency analysis of the original 2012 bill.

The MAIPF has hired more claims adjusters and is auditing medical costs and catching fraud, Miller said.

Pete Kuhnmuench, executive director of the Insurance Institute of Michigan, which represents property and casualty insurers in the state, told Crain’s the organization learned the credit existed late in the legislative process, but it wasn’t discussed because “that wasn’t the focus of the debate.”

Most insurance companies that write auto policies in the state — but especially those headquartered in Michigan — can redeem, dollar-for-dollar, the amount they pay to the MAIPF under a provision in the state’s tax code. That credit, in turn, reduces the companies’ state insurance tax liability.

Zin said the tax credit contributed to a roughly 20 percent reduction in the state’s total insurance tax revenue.

“It’s a big tax reduction,” he said of the credit.

Kuhnmuench met last week with House Speaker Kevin Cotter, who wants to learn the effect of the credit to date and what effect it could have if eliminated, Cotter spokesman Gideon D’Assandro said.

Senate Minority Leader Jim Ananich, a Flint Democrat, plans to propose a bill that would end the credit and dedicate the $80 million in revenue to fix old pipes that have leached lead into the city’s drinking water.

Rising costs

Insurers, however, say they would be forced to pass on any increases in the amount they pay into the assigned claims program to policyholders if the credit were eliminated.

About half of the state’s assigned claims come from Wayne County, with 40 percent from Detroit, Miller said. Detroit has some of the nation’s highest auto insurance rates, and driving without coverage is more common.

Costs of uninsured crashes also have been rising. Assessments to insurers have jumped from $141.4 million in 2008 to $238.7 million in 2015, data show.

A tax credit draws revenue from the state’s general fund — thus, from all taxpayers — rather than only from motorists who purchase insurance policies, Miller said.

Kuhnmuench calculated the cost per vehicle of the credit to be roughly $31.73, based on $238 million in payments from insurers last year divided by an estimated 7.5 million auto insurance policies in Michigan.

“If we eliminate that credit, automatically our costs go up that much because we can’t write it off anymore,” he said. “Is that the right public policy that the cost of this social benefit should only be imposed upon the folks that actually obey the law and buy the car insurance like they’re supposed to?”