A Commentary on the Unconstitutional Circumvention of the Fourteenth Amendment and the Commerce Clause
All states, except for Oregon, subject insurance companies to premium taxes, with most states imposing premium taxes in lieu of income taxes. These taxes range from 0.5% to 4.35%, with an average of 2%. Because of the different rates, most states have also enacted retaliatory legislation. A typical retaliatory tax statute requires that a foreign insurer be taxed at a higher rate than a domestic insurer, if the foreign insurer's domicile state has a higher premium tax. A retaliatory tax is therefore, on its face, a discrimination against insurers domiciled in a state with a high premium tax rate, regardless if all insurers in the other state are all taxed at the same rate. All insurance regulation is subject to state law by virtue of the McCarran-Ferguson Act, which removed the business of insurance from the scope of federal regulation.
The tension between state and federal regulation of the insurance industry reaches as far back as the Civil War. Insurance was deemed to be outside of the scope of federal regulation until a drastic change in 1944 placed it back within the meaning of interstate commerce. The Supreme Court held that Congress may regulate insurance through its Commerce Clause powers. In the aftermath of that decision, Congress passed the McCarran-Ferguson Act which explicitly placed the business of insurance back in the realm of state law.
Although the Supreme Court has thus far upheld retaliatory taxes as constitutional under the Equal Protection Clause and the Commerce Clause, it has done so through flawed reasoning and insufficient scrutiny of the motivations behind a retaliatory tax. Retaliatory taxes should be struck down under at least three grounds: the Commerce Clause, the Equal Protection Clause, and through a parens patriae suit. First, the McCarran-Ferguson Act should not be construed to allow for discriminatory legislation, but rather should only be construed to mean what it says: to place the regulation of the business of insurance with the states. Second, states that enact retaliatory legislation do not have a legitimate state interest in what essentially is an attempt to regulate other states' fiscal policies, which violates the Equal Protection Clause. Third, states may bring a parens patriae suit to recover for direct economic harm they have suffered as a result of retaliatory tax legislation. This article explores each of these avenues, and argues that the Supreme Court should find state retaliatory taxes schemes unconstitutional.
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