Opinion ID: 1190812
Heading Depth: 2
Heading Rank: 1

Heading: AS 21.09.210(b) IS UNCONSTITUTIONAL UNDER THE EQUAL PROTECTION PROVISIONS OF THE FEDERAL AND ALASKA CONSTITUTIONS.

Text: We conclude that former AS 21.09.210(b) [7] violates the equal protection clauses of both the Alaska and the federal constitutions. Principal's main argument, which we find persuasive, is that AS 21.09.210(b) is unconstitutional because it imposes a higher tax on foreign insurance companies than on domestic insurance companies, a discrimination which lacks any legitimate state purpose. Under federal equal protection analysis, the imposition of more onerous taxes or other burdens on foreign corporations than those imposed on domestic corporations [is forbidden] unless the discrimination between foreign and domestic corporations bears a rational relation to a legitimate state purpose. Western & Southern Life Insurance Co. v. State Board of Equalization, 451 U.S. 648, 668, 101 S.Ct. 2070, 2083, 68 L.Ed.2d 514, 530 (1981) ( Western & Southern ). What level of scrutiny such discrimination is subject to under Alaska equal protection analysis has not been decided by this court. [8] In any case, the minimum level of equal protection scrutiny in Alaska, also denominated a rational basis test, is more demanding than the federal rational basis test mandated by Western & Southern. [9] In Ward, the Supreme Court considered Alabama's differential premium tax statute, Ala. Code § 27-4-4 & -5 (1975). 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751. The Court held that the two purposes of the statute advanced by the state, promoting the formation of new domestic insurance companies in Alabama and encouraging capital investment by insurance companies in Alabama, were not legitimate state purposes, but rather were purely and completely discriminatory, designed only to favor domestic industry... . 470 U.S. at 878, 105 S.Ct. at 1681, 84 L.Ed.2d at 759. The state denies that AS 21.09.210(b) reflects any intent to penalize foreign, or reward domestic, insurers, and advances three state purposes it believes are legitimate: 1) The tax differential enables domestic insurers, burdened by Alaska's higher costs of doing business, to maintain competitive equality with foreign insurers. 2) The tax differential ensures a more stable insurance market in Alaska because domestic insurers cannot leave the state if they perceive the risks to be too high. 3) The tax differential increases the availability of insurance in Alaska because domestic insurers are more familiar with the state and will write coverage for risks which foreign companies will not insure. We are not persuaded by the state's arguments. Even if we accept the legitimacy of these purposes, [10] there is no evidence whatsoever in the record to support the state's contention that they are advanced by the differential tax rates imposed by AS 21.09.210. [11] The state's first argument fails to persuade us because the state has not presented any evidence supporting its claim that domestic insurers have a higher cost of doing business in Alaska than do foreign insurers. Moreover, even if such evidence were presented or judicially noticed, it is doubtful that any difference is simply the result of the insurer's decision to locate its home office in Alaska. It is reasonable to assume that foreign and domestic insurers operating in Alaska pay their Alaska agents and claims adjusters roughly equivalent salaries and commissions, and that their Alaska policyholders make equivalent numbers of claims. (Payment of claims is the largest cost of doing business.) The state has introduced no evidence indicating that foreign and domestic insurers insure different Alaska risk pools. The only substantial business expense that may be significantly higher in Alaska than in Des Moines, Iowa, where Principal's home office is located, is administrative costs (paperwork). [12] This argument becomes much less persuasive when we substitute Hartford-based Aetna or New York-based Metropolitan Life for Principal. However, there is nothing preventing an Alaska insurer from contracting out the bulk of its paperwork to a non-Alaska company or setting up an administrative center in a less expensive state. Contrary to the state's second argument, there is no reason why domestic insurers cannot leave the state if they find the risks to be too high; Alaska-organized insurers are free to obtain licenses to do business in other states, just as foreign insurers are free to seek licenses to do business in Alaska. Third, merely because an insurer is organized in Alaska does not necessarily mean that it is more familiar with the state than are foreign insurers (who may have operated in the state for much longer periods of time). [13] Even if we assume that domestic insurers are more familiar with Alaska's insurance environment than are foreign insurers, it does not logically follow that domestic insurers will write coverage for risks that foreign companies will not insure. Indeed, a domestic insurer's alleged greater familiarity with the state may cause it to avoid underwriting Alaska risks that foreign underwriters do underwrite. Nothing in Alaska's insurance laws compels domestic insurers to underwrite risks that foreign insurers are not required to underwrite. The Michigan Court of Appeals reached the same conclusion in finding Michigan's differential tax statute unconstitutional: We hold that, unlike in Ward, the purpose advanced by the state is legitimate (i.e., making insurance coverages available to residents), but the means chosen are not rationally related to promoting that purpose. The classification scheme is based on residency. Although it is not required that close distinctions be drawn in making classifications, the foreign/domestic classification scheme made here affords no opportunity for a foreign insurer to share in the tax preference given to domestic insurers if it desires to offer insurance in the areas of greatest public need despite the lower profit potential. The classification scheme also permits a domestic insurer to obtain a tax preference over foreign insurers even if the line of insurance offered is in a more lucrative market. Thus the classification is both under and over inclusive and not rationally related to promoting insurers to offer insurance in the high loss ratio areas such as medical malpractice, farm owners multiple peril, liquor liability, municipal liability, and product liability. Penn Mutual Life Insurance Co. v. Department of Licensing & Registration, 412 N.W.2d 668, 672-73 (Mich. App. 1987). See also Met. Life v. Com'r., 373 N.W.2d at 406-08 (holding North Dakota's premium tax, applicable only to foreign insurers, unconstitutional). The state's reliance on Western & Southern, in which the Supreme Court of the United States upheld the constitutionality of California's retaliatory tax [14] on commerce clause and equal protection grounds, is misplaced. A retaliatory tax does not violate the federal equal protection clause, the Court held, because it is rationally designed to deter[] other states from enacting discriminatory or excessive taxes, thereby promoting the domestic insurance industry by lowering barriers to interstate business. 451 U.S. at 668-74, 101 S.Ct. at 2083-86, 68 L.Ed.2d at 531-35. Alaska's differential premium tax, on the other hand, does not encourage other states to lower the rate premiums they impose on Alaska insurers. For no matter how low the rate imposed by the foreign insurer's home state, AS 21.09.210 requires a foreign insurer to pay twice the premium rate paid by Alaska insurers. Unlike a retaliatory tax, AS 21.09.210 does not provide for the reduction of taxes on foreign business upon the reduction by their states of taxes imposed on Alaska businesses. Compare, AS 21.09.270, discussed supra in note 6. We therefore conclude that AS 21.09.210(b) is unconstitutional under the equal protection clauses of both the Federal and Alaska Constitutions. [15]