Tax Break for Insurers Upheld by High Court : Ruling: Justices cite Constitution, bar L.A., other cities from taxing business activities that are not related to underwriting.
SAN FRANCISCO — A sharply divided state Supreme Court, denying municipalities millions of dollars in potential revenue, refused Monday to allow Los Angeles and other California cities to tax insurers for business activity unrelated to insurance.
The court held 4 to 3 that under a long-established provision of the state Constitution, insurance companies were exempt from local business taxes on income from investments in hotels, parking facilities and other noninsurance-related enterprises.
Allowing such taxation “would be nothing more than judicial legislation,†Justice Edward A. Panelli wrote for the court majority. “The Constitution not having provided such an exception, it is not within our province to do so.â€
The court’s three dissenters assailed the majority for creating an “enormously lucrative loophole†that would invite tax-protected insurer investments in restaurants, stores, theaters, video parlors or even doughnut shops.
“The majority decision grants insurance companies that operate extraneous businesses a virtual exemption from taxes, a benefit that has heretofore belonged only to churches and charities,†Justice Stanley Mosk wrote in a dissent joined by Justices Allen E. Broussard and Joyce L. Kennard. “I know of no insurance carrier that qualifies as a church or charity.â€
At issue was a constitutional amendment adopted in 1910 that, with the exception of real estate and motor vehicle taxes, exempts insurers from paying “all other taxes†in return for their paying a tax on gross income from premiums. Insurers now pay the state more than $1 billion annually in gross premium taxes.
For decades, that provision of the Constitution had been interpreted to bar local business taxes on insurances companies. But in 1982, a state Court of Appeal held that the city of San Francisco could impose a personal property tax on a hotel owned by an insurer because such activity was not related to insurance. The appeal court concluded that while “passive†investments--such as stocks and bonds--were exempt, municipalities could tax “active†investments--such as a hotel.
The city of Los Angeles began imposing parking, property-rental and utility-user taxes on insurer investment properties the city said were unrelated to insurance. The Mutual Life Insurance Co. of New York challenged the action and in 1988 won a ruling from an appeals court in Los Angeles that such taxes were prohibited.
Los Angeles appealed the decision to the state Supreme Court, and was backed by San Francisco, San Diego and other municipalities.
A ruling in their favor could have provided a potentially lucrative source of funding for cities and counties seeking to replenish treasuries hard hit by Proposition 13, the 1978 property-tax initiative.
But on Monday, the high court said both the language and intent of the amendment left no doubt that insurers could not be taxed on investment income.
“The wisdom of the constitutional provision is not for us to judge, and any inequity resulting is for the people or the Legislature to correct,†Panelli said in an opinion joined by Chief Justice Malcolm M. Lucas, Justice David N. Eagleson and retired Justice Marcus M. Kaufman, participating by special assignment.
Panelli said there was sound public-policy support for exempting investment income from taxation. Because insurers do not generate enough income from premiums to pay for operating expenses and claims, they must make investments to stay in business, he said.
“To tax investment income would be to minimize the value of the investment and reduce the sums available for the reserves, to the potential detriment of policyholders,†Panelli wrote.
Douglas P. Smith of Irvine, a lawyer representing the insurer in the case, welcomed the ruling and defended the company’s investments as a way of protecting policyholders. “Insurers invest to increase their reserves and policyholders are the ultimate beneficiaries,†Smith said. “The price of their insurance goes up and down depending on how canny the investors are.â€
Los Angeles Assistant City Atty. Ronald A. Tuller expressed disappointment with the decision, saying the city now will have to return up to $3 million in revenue it previously had collected from insurers.
In San Francisco, Deputy City Atty. John J. Doherty, representing the cities supporting Los Angeles in the case, said he expected that insurers--which until now had concentrated on investments in stocks and bonds--would turn increasingly to such enterprises as operating hotels and leasing computer equipment.
“They now can expand into more active types of business activities and be able to do so free of local business taxes,†Doherty said.
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