State seeks to eliminate tax credit for auto insurers

LANSING — Nearly 100 auto insurers in Michigan last year claimed a previously unavailable tax credit that is expected to cost the state $80 million in annual revenue.

Some state lawmakers now say they want to fix what they’re calling an unintended consequence of a three-year-old policy change that shifted administrative oversight of Michigan’s assigned claims plan, which covers medical expenses for people injured in crashes in which no party has auto insurance.

The issue could become a thread in a bigger debate related to reforming Michigan’s no-fault auto insurance law, which covers the assigned claims process, even as bills to update the program stall in the Legislature.

On one hand, representatives for the insurance industry say the credit compensates for the amount insurers pay each year to reimburse the Michigan Automobile Insurance Placement Facility for the cost of medical treatment it is required to cover for uninsured crash victims — costs, they say, that ultimately are passed on to Michigan policyholders as higher premiums.

Yet redemption of the tax credit will have budget implications. The new claims caught the state by surprise: It wasn’t until December that Treasury Department officials linked several months of lower-than-expected state insurance tax collections with the new incentive.

The credits were expected to cost the state’s general fund $60 million in the 2015 fiscal year, which ended Sept. 30, and $80 million annually going forward, according to treasury estimates.

News of the insurance credit surfaced last month during a state revenue estimating conference. That drop in state revenue will be one factor in the 2017 fiscal-year budget Gov. Rick Snyder is scheduled to present on Wednesday.

In all, 93 auto insurance companies claimed the new credit for the 2014 tax year, which affected the 2015 fiscal year’s revenue, state Treasury Department spokesman Terry Stanton said. He would not disclose the names of the companies or the amount of individual credits, citing privacy laws.

The 2012 law that triggered the credit moved management of the assigned claims program from the Michigan Department of State, where it had been housed since its creation in 1973, to the Michigan Automobile Insurance Placement Facility, or MAIPF, the state’s residual insurance market that assigns uninsured injury claims to participating carriers.

The facility also serves as Michigan’s insurer of last resort and writes policies for drivers who can’t buy one on the open market because of poor driving records.

Legislative fiscal analysts and some lawmakers were surprised in January when they learned of the credit, in large part because few had connected the tax code implications from the legislative changes to the state’s insurance code.

“Nobody reading the bill would have said, ‘Oh, wow, this is going to do something with the taxes. We should have the tax people look at it,’ ” said David Zin, chief economist with the Senate Fiscal Agency, which analyzes the fiscal impact of proposed legislation. “I mean, it’s a bill that just moved something from one office to another.

“The fact that this hasn’t become an issue until this year and we made the change three years ago suggests at the time (insurers) may not have known it was going to be an issue, either.”

‘Big tax reduction’

Michigan’s assigned claims program processes between 3,000 and 4,000 claims each year, said Terri Miller, executive director of MAIPF.

It covers medical care for people injured in auto accidents who don’t have insurance. That can include pedestrians hit by an uninsured or hit-and-run vehicle when the pedestrian also doesn’t have his or her own coverage, or children riding in an uninsured vehicle who are involved in a crash.

Seven private insurers handle assigned claims as they would for any other policyholder, with one notable difference — the recipient of assigned claims benefits does not pay an auto insurance premium.

The cost of that care, then, is shared among all insurance companies that write auto policies in the state through an assessment MAIPF charges. More than $238 million was charged to insurers last year, according to the Insurance Institute of Michigan.

For years, the insurance industry had pushed for legislation that would move the assigned claims program into an organization with more expertise in vetting claims. At the time, the Department of State agreed, saying it wasn’t designed to be an insurance claims adjuster, according to a House Fiscal Agency analysis of the original 2012 bill.

The MAIPF has hired more claims adjusters and is auditing medical costs and catching fraud, Miller said.

Pete Kuhnmuench, executive director of the Insurance Institute of Michigan, which represents property and casualty insurers in the state, told Crain’s the organization learned the credit existed late in the legislative process, but it wasn’t discussed because “that wasn’t the focus of the debate.”

Most insurance companies that write auto policies in the state — but especially those headquartered in Michigan — can redeem, dollar-for-dollar, the amount they pay to the MAIPF under a provision in the state’s tax code. That credit, in turn, reduces the companies’ state insurance tax liability.

Zin said the tax credit contributed to a roughly 20 percent reduction in the state’s total insurance tax revenue.

“It’s a big tax reduction,” he said of the credit.

Kuhnmuench met last week with House Speaker Kevin Cotter, who wants to learn the effect of the credit to date and what effect it could have if eliminated, Cotter spokesman Gideon D’Assandro said.

Senate Minority Leader Jim Ananich, a Flint Democrat, plans to propose a bill that would end the credit and dedicate the $80 million in revenue to fix old pipes that have leached lead into the city’s drinking water.

Rising costs

Insurers, however, say they would be forced to pass on any increases in the amount they pay into the assigned claims program to policyholders if the credit were eliminated.

About half of the state’s assigned claims come from Wayne County, with 40 percent from Detroit, Miller said. Detroit has some of the nation’s highest auto insurance rates, and driving without coverage is more common.

Costs of uninsured crashes also have been rising. Assessments to insurers have jumped from $141.4 million in 2008 to $238.7 million in 2015, data show.

A tax credit draws revenue from the state’s general fund — thus, from all taxpayers — rather than only from motorists who purchase insurance policies, Miller said.

Kuhnmuench calculated the cost per vehicle of the credit to be roughly $31.73, based on $238 million in payments from insurers last year divided by an estimated 7.5 million auto insurance policies in Michigan.

“If we eliminate that credit, automatically our costs go up that much because we can’t write it off anymore,” he said. “Is that the right public policy that the cost of this social benefit should only be imposed upon the folks that actually obey the law and buy the car insurance like they’re supposed to?”

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Mon, 02/08/2016 - 1:10pm
Hmmm... they didn't used to be able to clam a credit, but still had the same expense. Any bets on whether they dropped our auto premiums when they started claiming the credit? I'm virtually certain they didn't and just pocketed the new, unintended, credit.
John S.
Mon, 02/08/2016 - 2:14pm
It would be nice if the legislature did something to address the root causes of the problem: there are too many uninsured drivers on the roads. There's need to reform auto insurance to make it more affordable. There's need for better enforcement. There's need for higher penalties for driving without insurance. There's need for better public transportation. That 40% of assigned claims are from Detroit says that there are a lot of auto owners in the city (many poor) who can't afford insurance, won't buy it, and will continue driving without it (regardless of the law). It's also possible that fraud with assigned claims is higher in the city. Who is monitoring potential fraud?
Wed, 02/10/2016 - 10:53pm
People with a history of driving without insurance should have their vehicle seized and sold at auction to help cover the cost of uninsured drivers. I would say if you are caught twice in a 2 year period without insurance you lose your car. Banks should be required to report to the local police when a client becomes uninsured so that person can be taken off the road. Allow banks to repo cars whos drivers are ticketed for no insurance and make the driver pay a fine. Right now people have more to gain by breaking the law when money is tight than they stand to lose if they are caught. The only way to stop uninsured driving is to make it more painful to drive without insurance than the perceived advantages one gains by breaking the law.
Dennis Smith
Mon, 02/08/2016 - 2:17pm
Unintended consequence. That seems to be the theme with Michigan's clueless legislators and governor. "Oh but we could never have anticipated that moving this responsibility from a state agency working for the people to a private entity paid for by industry would allow them to cheat us!"
Tue, 02/09/2016 - 9:49am
To paraphrase R.Reagan, the conservative savior, "Here we go again." Every couple of months we hear about another "unanticipated" giveaway that this (Republican) Legislature discovers. They always seem to find the money to pay for it, out of the general fund, which according to my State Representative, Ray Franz, doesn't have enough money to meet the basic needs of the People in his district. Gerrymandering and term limits have destroyed the institutional memory that might have prevented these problems. The Republicans insist that government should be run like a business. Business would never place untrained, ignorant "newbies" in positions of serious decision making every six years or so. Business is designed to sell things to the public. The pupose of Government is to serve the People. It is time we elected candidates who wish to serve the people, not sell us their denigrating view of Public Service.
Tue, 02/09/2016 - 1:08pm
"The facility also serves as Michigan’s insurer of last resort and writes policies for drivers who can’t buy one on the open market because of poor driving records"Asking the obvious question: Why aren't people with no insurance even allowed to drive on the road? If they cannot (will not) pay for insurance like the rest of us are required to do, why are they not arrested and their vehicles seized to pay for the legal costs? Michigan roads will be far safer when those who should not even be on the road loose their ride.
Tue, 01/03/2017 - 1:43am

The real problem lies in the fact that many motorists in Michigan drive without insurance. Affordability of insurance plans and payment of premiums is contingent on one's income and employment status. Even more important is the availability of a variety of insurance providers. Unless the authorities take steps to ensure that all motorists invest in auto insurance, the insurers are at a losing end.