Massachusetts Governor Deval Patrick released his proposed FY 2015 budget on January 22, 2014. The proposed budget includes a tax provision that is targeted directly at the licensed insurance industry. Currently, income earned by pass-through entities—such as partnerships—that are owned by licensed life or property and casualty insurers is excluded from Massachusetts income tax because the owners are subject to a premium tax, and not the income or franchise tax based on the net income of the entity. The proposal would treat pass-through entities owned by insurance companies as corporate entities for Massachusetts tax purposes. A similar proposal had been discussed in the Multistate Tax Commission Financial Institutions Work Group, but ultimately did not materialize. As of now, it appears that Massachusetts is the only state proposing this type of pass-through tax provision. Those supporting the proposal believe that insurance companies conducting non-insurance business in these pass-through entities obtain an unintended tax advantage. The insurance industry strongly disagrees with this view and counters that the tax on gross premiums, which applies even when the company realizes a net loss, already accounts for the fact that investment income earned on capital and reserves is exempt from the income tax. Arbitrarily taxing this source of investment income effectively amounts to double taxation of such companies.
The provision would apply when an insurance company owns, directly or indirectly, at least 50 percent of an entity engaged in a non-insurance trade or business that would otherwise be treated as a partnership or disregarded entity. In that case, the net income that passes through to the insurance company with respect to the non-insurance trade or business would be taxed as if the partnership or disregarded entity were a corporation subject to the state’s corporate excise tax. This proposal has the potential to impact insurance companies with investments in Massachusetts, particularly pass-through entities that are domiciled or doing business in Massachusetts. Before this pass-through tax provision could make its way into law, it would have to survive the legislative budget approval process, which generally concludes in June or July.