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

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Author Info
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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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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Handle: RePEc:nbr:nberwo:6590

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Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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  1. 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. [Downloadable!] (restricted)
  2. Mayers, David & Smith, Clifford W, Jr, 1988. "Ownership Structure across Lines of Property-Casualty Insurance," Journal of Law & Economics, University of Chicago Press, vol. 31(2), pages 351-78, October.
  3. Goodspeed, T-J & White, A-D, 1996. "International taxation," Papers 96-11, Wellesley College - Department of Economics.
  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!]
  6. 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, Oxford University Press for Society for Financial Studies, vol. 3(4), pages 625-50. [Downloadable!] (restricted)
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