Opinion ID: 2637340
Heading Depth: 4
Heading Rank: 3

Heading: The retaliatory tax statute bears a fair and substantial relationship to its purpose.

Text: Washington taxes non-profit health care services contractors on two percent of all premiums and prepayments for health care services, similar to the manner in which it taxes for-profit health care service contractors. [45] This tax rate applies equally to foreign and domestic health care service contractors, [46] and would therefore apply if an Alaskan health care services contractor were to offer health care services in Washington. HMSCs in Alaska are taxed at a rate of six percent of their gross premiums less claims paid, a more favorable rate when compared to both Washington health care services contractors and all domestic and foreign insurers in Alaska except for HMSCs, which are taxed at a rate of 2.7 percent. [47] Since retaliatory statutes substitute the general tax laws of the foreign insurer's home state for the general tax laws of the state applying the retaliatory statute whenever the general tax laws of the foreign insurer's home state are more burdensome than the general tax laws of the state applying the retaliatory statute, [48] Alaska's retaliatory tax statute has been applied to Blue Cross. Blue Cross claims that the Division's application of AS 21.09.270 violates equal protection when applied to Blue Cross: (1) because it is illegitimate to retaliat[e] against Blue Cross and the State of Washington for the Washington Legislature's policy decision to impose a non-discriminatory tax on health service contractors . . . similar to the premium taxes imposed on for-profit insurers; and (2) because even if the purpose of AS 21.09.270 were legitimate, the imposition of retaliatory taxes on Blue Cross does not fairly and substantially advance that purpose. We address each argument in turn. Blue Cross argues that Alaska has no legitimate interest in attempting to coerce changes in Washington's non-discriminatory HMSC tax policies, which would tax a hypothetical Alaskan HMSC doing business there in precisely the same manner, at the same rate, as Blue Cross is taxed. But the coercive nature of retaliatory taxation that Blue Cross deems illegitimate is precisely that sanctioned by the United States Supreme Court in Western & Southern Life Insurance Co. v. State Board of Equalization of California. [49] In Western & Southern, the United States Supreme Court upheld California's retaliatory tax as constitutional under the federal Equal Protection Clause. [50] In upholding the statute, the Supreme Court reasoned that promotion of domestic industry by deterring barriers to interstate business is a legitimate state purpose and the mere fact that California was trying to promote its insurance industry by influencing the policies of other states through retaliatory taxation did not render the purpose illegitimate. [51] It further concluded that it was reasonable for California to suppose that its retaliatory taxes would induce other states to lower the burdens on California insurers in order to spare their domestic insurers the cost of the retaliatory tax in California. [52] Here, Blue Cross acknowledges that in Alaska we tax non-profit HMSCs in a different manner and at a lower effective tax rate than for-profit insurers. Washington, however, chooses to tax its non-profit health care services corporations at a relatively higher rate, similar to its for-profit insurers. [53] Applying the retaliatory tax statute to a Washington non-profit when Washington would impose higher taxes if an Alaskan non-profit health care services corporation were to conduct business in Washington is thus fully consonant with the well-established and constitutionally permissible purpose of retaliatory tax statutes, even if the intent of Alaska is to coerce Washington into lowering its taxes on non-profit health care services corporations. While the record with respect to the presence of Alaskan insurers in Washington or other foreign jurisdictions is sparse, according to Couch on Insurance 3d, [i]t is generally held that the fact that there is no local company doing business in the foreign state does not prevent the operation of the retaliatory statute. [54] That the retaliatory statute serves to protect both established insurers conducting business across state lines and those desirous of entering foreign jurisdictions is underscored by the legislative history of AS 21.09.270, which states that the statute was enacted for the protection of Alaska insurers transacting or desiring to transact business in other states. We therefore reject Blue Cross's claim that AS 21.09.270 was applied to Blue Cross for the illegitimate purpose of influencing Washington's tax policy. We next assess whether AS 21.09.270 bears a fair and substantial relationship to its legitimate purpose. The retaliatory tax statute was adopted in Alaska in connection with a comprehensive revision of Alaska's insurance laws. Its stated purpose was to protect the domestic insurance company insofar as getting equal treatment when it entered foreign jurisdictions. [55] Blue Cross argues that because an Alaskan company would get equal treatment in Washington when compared to Washington health care services corporations, the retaliatory tax statute does not advance the purpose of AS 21.09.270 of equalizing the treatment of hypothetical Alaskan companies when they enter the jurisdiction. But Blue Cross's narrow reading of the purpose clause suggests that retaliatory statutes are only intended to equalize the treatment of insurers within, and not across, jurisdictions. Historically, their purpose has not been so limited. As the United States Supreme Court has noted, the principal purpose of retaliatory tax laws is to promote the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes.  [56] We therefore agree with the Division and the superior court that the purpose clause of AS 21.09.270 should be read in harmony with typical retaliatory statutes as intending to equalize and lower taxes on domestic insurers across states and not just within states, and assess the means-to-end fit with this broader purpose in mind. The United States Supreme Court upheld California's retaliatory tax statute in Western & Southern under the federal Equal Protection Clause, applying the relatively deferential federal rational basis test, which requires only that legislation bear a rational relation to a legitimate state purpose. [57] In the wake of Western & Southern, state courts have upheld retaliatory statutes in the face of equal protection challenges under similarly deferential rational basis review. For example, the Supreme Court of Florida upheld Florida's retaliatory tax, which was similar in structure to the retaliatory tax that was upheld against similar challenges in Western & Southern Life.  [58] The Supreme Court of Florida noted: Western & Southern Life also made clear that retaliatory taxes, which have been a common feature of insurance taxation for over a century, are rationally related to the states' legitimate interest in promoting the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes. Because it is at least fairly debatable that the Florida legislature enacted section 624.429 with this well recognized purpose in mind, the Equal Protection challenge . . . was properly rejected.[ [59] ] And according to Couch on Insurance 3d, [b]y the weight of authority, a state has the power to protect its own domestic insurance companies doing business in other states by imposing regulatory requirements of equal stringency upon the insurance companies of those states. [60] Blue Cross urges that this court depart from this authority because a higher level of scrutiny applies under the Alaska Constitution. And Blue Cross is correct that under Alaska's equal protection clause, we do subject legislation to a more exacting inquiry than under the federal rational basis test, [61] requiring that classifications be reasonable, not arbitrary, and . . . rest upon some ground of difference having a fair and substantial relation to the object of the legislation. [62] We are persuaded, though, that even under our more demanding test, AS 21.09.270 passes constitutional muster. Since AS 21.09.270 was applied to Blue Cross only because Washington would apply more onerous taxes on a hypothetical Alaskan non-profit health care services corporation operating in Washington, we find that the purpose of AS 21.09.270 of equalizing and lowering taxes across states is fairly and substantially furthered by imposition of the retaliatory tax on Blue Cross.