MINUTES OF THE SENATE COMMITTEE ON TAXATION Sixty-eighth Session January 24, 1995 The Senate Committee on Taxation was called to order by Chairman Sue Lowden, at 1:45 p.m., on Thursday, January 24, 1995, in Room 224 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Sue Lowden, Chairman Senator Kathy M. Augustine, Vice Chairman Senator Ann O'Connell Senator Randolph J. Townsend Senator John B. (Jack) Regan Senator Ernest E. Adler COMMITTEE MEMBERS ABSENT Senator Dean A. Rhoads (Excused) STAFF MEMBERS PRESENT: Kevin Welsh, Deputy Fiscal Analyst Lisa Clearwater, Committee Secretary OTHERS PRESENT: Jeanne Botts, Program Analyst, Fiscal Analysis Division David Hall, Deputy Commissioner, Division of Insurance, Department of Business and Industry Gregory P. Harwell, Lobbyist, California State Automobile Association Carole Vilardo, Lobbyist, Nevada Taxpayers Association Howard Barrett, Lobbyist, Nevada Taxpayers Association Robert L. Crowell, Lobbyist, Farmers Insurance Group Debbie Cahill, Lobbyist, Nevada State Education Association Joseph C. Guild, Lobbyist, State Farm Insurance Company James L. Wadhams, Lobbyist, American Insurance Association Perry Comeaux, Director, Department of Administration Senator Lowden gave a brief history of Assembly Bill (A.B.) 331 of the Sixty-seventh Session. Senator Lowden then asked Jeanie Botts to give an overview of Senate Bill (S.B.) 122 which repeals the prepayment of insurance premium tax (A.B. 331 of the Sixty-seventh Session). ASSEMBLY BILL 331 OF THE SIXTY-SEVENTH SESSION: Requires annual prepayment of insurance of tax on insurance premiums. SENATE BILL 122: Repeals requirement for prepayment of insurance premium tax. Ms. Jeanne Botts, Program Analyst, Fiscal Analysis Division, testified from her prepared testimony (Exhibit C). She also distributed copies of the proposed amendment to S.B. 122 (Exhibit D). She explained, section 8 was the section intended for an effective date of January 1, 1996, and the rest of the bill would become effective upon passage and approval. She stated the reason is, section 8 is the provision that allows companies to consider prepayment as assets, and if for some reason the bill did not pass prior to March 1, 1995, and some prepayments had been made, companies could consider those assets. Ms. Botts continued with her prepared testimony explaining the fiscal effect of S.B. 122. She further explained the Comparison of Estimated Collections of Insurance Premium Tax under Various Bills in a chart (Exhibit E). She stated: The Governor shall budget a reserve of between 5 and 10 percent of budgeted appropriations. That means his unappropriated ending fund balance as of July 1, 1995, should be between $70 million and $141 million, and it is at $89.6 million. However, if the $35.5 million is deducted for the one-time insurance premium tax prepayment it reduces the projected balance to $54 million. Senator Adler inquired whether the Legislature needs to come up with $19 million out of the budget to fund the $35 million. Ms. Botts advised him this was correct. She added the Governor's projected ending fund balance of $89.6 million does meet the 5 to 10 percent test as he is required to do, and if this amount is reduced to $54 million, it is below the 5 percent. The Governor is required to and has submitted a budget that meets the 5 to 10 percent test in fiscal 1994-1995. However, the Legislature is not similarly bound, but may wish to maintain such a balance. To do so, she explained, would require reductions in the recommended appropriations which are listed on page 3 (Exhibit E), General Fund Unappropriated Balances. Senator O'Connell questioned whether it was anticipated to add $17 million to the Rainy Day Fund. Ms. Botts said she did not recall what was anticipated, but $18 million was added to the Rainy Day Fund at the end of fiscal 1993-1994. Senator O'Connell inquired whether Mr. Barrett or Ms. Vilardo of the Nevada Taxpayers Association would remember that amount. Carol Vilardo, Lobbyist, Nevada Taxpayers Association, stated there was not an amount budgeted in the Budget Stabilization Fund for this biennium. She said the first time the formula came into play was effective January 1, 1993, and it came out to be $18 million. Ms. Botts continued her testimony explaining the Comparison of Estimated Collections of Insurance Premium Tax Under Various Bills chart (Exhibit E). She stated the figures on this chart are consistent with estimates made by the Economic Forum and the figures used in the Governor's Executive Budget. Senator Lowden questioned whether it was estimated the insurance tax brings in approximately 7 percent to the General Fund. Ms. Botts confirmed this was correct. She informed the committee the Insurance Premium Tax is the third largest source of revenue to the state General Fund providing 7.2 percent of General Fund revenue in 1993-1994. She said she has reviewed the projected years as budgeted by the Governor and it is between 7.3 and 7.4 percent. However, it is a larger percentage this year if the one-time payment is included. Senator Townsend inquired whether Ms. Botts could give the committee a percentage breakdown, putting the prepayment aside, of the total payment paid for automobile, property casualty and health insurance. She replied, when she worked at the insurance division, approximately 60 percent of the companies were life and health and only 40 percent were property casualty. She added, however, those 40 percent property casualty provided about 60 percent of the revenue. Ms. Botts further stated these were not recent figures and suggested someone from the Division of Insurance or the Department of Taxation could provide more accurate information. In response, David Hall, Deputy Commissioner, Division of Insurance, Department of Business and Industry, stated he could obtain and provide this information to the committee, possibly before the end of the meeting. Senator Lowden asked Ms. Botts whether the proposed $16 million new legislative building is included in the Capital Improvement Projects for Fiscal Year 1994-1995 referred to on page 3 of Exhibit E. Ms. Botts advised her it is. Senator Lowden continued the meeting asking for testimony from those who were present to support the repeal of A.B. 331 of the Sixty-seventh Session. Carole Vilardo, Lobbyist, Nevada Taxpayers Association, stated the association supports the repeal of A.B. 331 of the Sixty-seventh Session , and considers prepayment of insurance premium taxes bad tax policy. She gave a brief analogy of how the prepayment of tax would affect the private citizen if he were required to prepay his sales tax. She also suggested there would be additional legislation submitted to consider the repeal of prepayment of other taxes. Howard Barrett, Lobbyist, Nevada Taxpayers Association, read from his prepared testimony (Exhibit F) and reiterated Ms. Vilardo's testimony that it is bad tax policy to require any taxpayer to prepay taxes on income not yet received. Mr. Barrett added, the Nevada Taxpayers Association strongly supports the addition of money to the reserve and, the addition of money to the Rainy Day Fund which the association considers good fiscal policy. However, the Nevada Taxpayers Association believes the state cannot build good fiscal policy which results in balances if the collection to build those balances was bad fiscal policy. Senator Lowden asked Mr. Barrett if the Nevada Taxpayers Association is suggesting taking from the Rainy Day Fund to make up the difference. Mr. Barrett responded by saying they are not, but if the Governor's budget is approved, as he has suggested, and the income is as the Economic Forum suggested, the money would have to come from someplace. He further stated, the difference is going to come out of the balance. Senator Adler inquired what other taxes such as gaming are prepaid. Mr. Barrett stated that gaming, mining and insurance are all prepaid. Mr. Barrett reiterated the comments of Ms. Vilardo regarding the submission of further legislation to repeal the prepayment of other taxes. Senator Adler asked Mr. Barrett if the prepayment of gaming taxes will be considered. Mr. Barrett responded that neither the Nevada Taxpayers Association nor the interim committee submitted anything regarding this matter. Ms. Vilardo interjected at this point and asserted that the interim committee formed subcommittees and discussed insurance, mining, business license, sales, real property and personal tax. They did not discuss gaming tax. Senator Adler brought the discussion back to the previous question asked by Senator Lowden as to whether the Legislature will need to come up with $19 million to reach the $75 million. Mr. Barrett stated, " If you want to retain the surplus as projected by the Governor and retain the Rainy Day Fund projected by the Governor, then there has to be $35 million cut some place else. It's a $35 million figure coming as one-time income in this year only which in effect goes into the surplus." Senator Lowden further responded to Mr. Adler that the Governor is required to reserve between 5 to 10 percent and the number Ms. Botts came up with was $19 million. Mr. Barrett added, Ms. Botts also pointed out the Governor has fulfilled that requirement by making the recommendation. There is nothing binding on the Legislature to require them to retain that amount of money. Senator Adler stated it is poor fiscal policy not to retain that money. Mr. Barrett responded, it is poor fiscal policy to require a taxpayer to prepay a tax in order to accumulate a balance. Gregory P. Harwell, Lobbyist, California State Automobile Association, testified in support of S.B. 122 from the California State Automobile Association's policy holders' point of view. He stated that by prepaying premium taxes it takes away money they could be investing and therefore generate investment income. He further added that investment income is a large factor in the rate setting, so any improvement certainly improves the rates for the consumers. Senator Lowden interjected and stated, "2 years ago the legislators were told the consumer was the one who would pick up the tab for the prepayment." Mr. Harwell replied, as he understood it the insurance premium tax is included in the rate- making process, and therefore it is a part of the premium and paid for by the policyholders. He further added, it doubles if not triples some of the bookkeeping efforts the carriers are required to maintain and that affects the operating expense which in turn is passed on to the policy holders. James L. Wadhams, Lobbyist, American Insurance Association, stated the association supports S.B. 122 and that A.B. 331 of the Sixty-seventh Session is bad tax policy. He suggested there is an area the committee should focus on because it is going to vary from what the committee might hear from the major insurance companies that write a great deal of consumer-based business. The problem with this kind of tax policy on the insurance marketplace and how it affects the consumer most particularly, are on companies that write limited kinds of coverage or speciality risks. A company that satisfies that insurance demand writes a handful of policies in any given year. Depending on the level of competition, they might lose the policies they had one year on the renewals the next year. This tax policy creates a chilling effect on these companies' willingness to come and meet those risks of certain businesses that have a speciality problem that has to be dealt with. So it does not affect those companies, as they decide to write that same kind of insurance in Oregon, Utah or Idaho. He further added, it affects those businesses that have special problems and now they cannot find companies that will write those risks. He concluded, this demonstrates there is a consumer impact beyond just the cost. Senator O'Connell asked Mr. Wadhams from his perspective, as past insurance commissioner, to give the committee some idea of the components reviewed when an insurance company is appearing before the commissioner for a rate hike. Mr. Wadhams responded by stating that interest income is a prime component of that process and, therefore, is a critical component and mandatory for consideration. Senator Adler asked Mr. Barrett to clarify how much impact the repeal of prepayment of insurance premiums would have on the individual consumer's premium. Mr. Barrett responded by stating the effect would be relatively slight. Robert Crowell, Lobbyist, Farmers Insurance Group, concurred with the comments of Mr. Barrett and Mr. Wadhams with one exception. Mr. Crowell said the effect of the prepayment of insurance premium tax would not only affect those carriers who wrote specific insurance lines, but would also apply to all carriers, because of the penalties that are built into the existing bill. He explained, "If you missed your payment schedule by 15 percent, you risk the penalty of being fined an administrative fine of $2,000 and a penalty of 5 percent of the underpayment, and interest on that underpayment of 18 percent per annum." He further suggested to the committee, "Every business desires to expand, but the effect of the penalty does operate as a chilling effect on the acquisition of new business." Farmers believes S.B. 122 does operate as the effective method of collection of this tax. Joseph C. Guild, Lobbyist, State Farm Insurance Company, testified on behalf of state farm in support of S.B. 122. He concurred with Mr. Wadham's testimony in support of S.B. 122, because it is good tax policy. Mr. Hall presented to the committee information previously requested by Senator Townsend on a percentage breakdown of the total payment paid for automobile, property casualty and health insurance. He stated the figures are 47 percent property and casualty and 53 percent life and health. Perry Comeaux, Director, Department of Administration, testified in opposition to S.B. 122. He explained to the committee the impact S.B. 122 would have on the Executive Budget submitted by Governor Miller, if approved. Senator Townsend interjected and stated to Mr. Comeaux that the purpose of the meeting was to discuss the repeal of the tax and not to discuss where the money will not be spent. He informed Mr. Comeaux that it is not the taxation committee's jurisdiction. Mr. Comeaux responded that he wanted to make sure that the committee understood the uses to which the Governor recommended for those funds reflected in his Executive Budget and he added that they all represent very serious needs of the various agencies of the state. He further stated that those requests and recommendations are under review by the money committees and the administration opposes this bill, because it would leave some amount of those needs unmet. Senator Lowden inquired from Mr. Comeaux to confirm that the $16 million for the proposed new legislative building comes out of the $99 million appropriations. Senator O'Connell asked Mr. Comeaux what kind of chilling effect this law has or what kind of precedence it sets as far as Nevada's concern for business. She further stated that this is sending a terrible message to business and to what the Legislature is trying to accomplish as far as bringing other businesses into Nevada. Mr. Comeaux said he could not respond as to what the effect might be in attracting other businesses to the state. He also stated that in light of the serious impact that this bill would have on the budget, the Governor has requested this bill be submitted to the finance committee for their review of the recommended expenditures included in the budget. Debbie Cahill, Lobbyist, Nevada State Education Association, testified in opposition to S.B. 122 due to the fact that the association is not sure of the impact of this bill. She stated, the association has major concerns regarding the impact of this bill on appropriations the Governor has designated in his budget to education. SENATOR O'CONNELL MOVED TO AMEND SECTION 12 (EXHIBIT G) OF SENATE BILL 122. SENATOR TOWNSEND SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR RHOADS WAS ABSENT FOR THE VOTE.) Senator Lowden called for a 5 minute recess at 2:37 p.m. Senator Lowden reconvened the meeting at 2:43 p.m. She stated that she had Amendment No. 6 to S.B. 122 as requested by the committee. SENATOR O'CONNELL MOVED TO DO PASS S.B. 122 AS AMENDED BY AMENDMENT NO. 6. SENATOR AUGUSTINE SECONDED THE MOTION. Senator Adler interjected at this point and requested an indication from the Senate Committee on Finance as to where they will obtain the $35 million. He further stated it would be his preference for it to come out of the stabilization fund. THE MOTION CARRIED. (SENATOR RHOADS WAS ABSENT FOR THE VOTE.) There being no further business, the meeting was adjourned at 3:45 p.m. RESPECTFULLY SUBMITTED Lisa Clearwater, Committee Secretary APPROVED BY: Senator Sue Lowden, Chairman DATE: Senate Committee on Taxation January 24, 1995 Page