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Managing Annual Accounting Reports to Avoid State Taxes: An Analysis of Property-Casualty Insurers

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  • Kathy R. Petroni
  • Douglas A. Shackelford

Abstract

We hypothesize that, in their annual accounting reports, insurers allocate premiums and losses from multistate policies to reduce total state taxes. To test this prediction, we examine firm-level data, collected from the publicly-available statutory reports used to compute tax bases and filed with each state government. If insurers manage allocations to avoid taxes, we anticipate an inverse relation between the tax rate and the premium-to-loss ratio, which is the industry's standard measure of the price of a unit of coverage. Firm-specific prices are computed using premium and loss information from the annual regulatory reports filed with each state in which an insurer underwrites. Primary analysis is conducted on 12,573 insurer-state observations from 1993. We find the premium-to-loss ratio is decreasing in state tax rates, consistent with multistate insurers managing their annual accounting reports to shift premiums (losses) to more (less) favorably taxed states.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6590.

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Date of creation: Jun 1998
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Publication status: published as Accounting Review, Vol. 74, no. 3 (1999): 371-393.
Handle: RePEc:nbr:nberwo:6590

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  1. Collins, Julie H. & Shackelford, Douglas A., 1997. "Global organizations and taxes: An analysis of the dividend, interest, royalty, and management fee payments between U.S. multinationals' foreign affiliates," Journal of Accounting and Economics, Elsevier, vol. 24(2), pages 151-173, December.
  2. Goodspeed, T-J & White, A-D, 1996. "International taxation," Papers 96-11, Wellesley College - Department of Economics.
  3. Scholes, Myron S & Wilson, G Peter & Wolfson, Mark A, 1990. "Tax Planning, Regulatory Capital Planning, and Financial Reporting Strategy for Commercial Banks," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 625-50.
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  5. Mayers, David & Smith, Clifford W, Jr, 1988. "Ownership Structure across Lines of Property-Casualty Insurance," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 351-78, October.
  6. Froot, Kenneth A., 1989. "Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Financial Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 333-355, September.
  7. Collins, Julie H. & Geisler, Greg G. & Shackelford, Douglas A., 1997. "The effects of taxes, regulation, earnings, and organizational form on life insurers' investment portfolio realizations," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 337-361, December.
  8. Shackelford, Douglas A., 1991. "The market for tax benefits : Evidence from leveraged ESOPs," Journal of Accounting and Economics, Elsevier, vol. 14(2), pages 117-145, June.
  9. Harry Grubert & Timothy Goodspeed & Deborah L. Swenson, 1993. "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," NBER Chapters, in: Studies in International Taxation, pages 237-276 National Bureau of Economic Research, Inc.
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Cited by:
  1. Margaret Lamb & Andrew Lymer, 1999. "Taxation research in an accounting context: future prospects and interdisciplinary perspectives," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 749-776.
  2. Bin Ke & Kathy Petroni & Douglas A. Shackelford, 1999. "The Impact of State Taxes on Self-Insurance," NBER Working Papers 7453, National Bureau of Economic Research, Inc.
  3. Inès Bouaziz Daoud & Mohamed Ali Omri, 2011. "Divergences comptabilité - fiscalité, gestion fiscale et gestion des résultats en Tunisie : les nouveaux défis," Post-Print hal-00646800, HAL.

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