New Jersey’s retaliatory tax, enacted in 1950 and codified at N.J.S.A. 17:32-15, has a wholly different purpose. That statute, stripped to its essentials, provides:
When by the laws of any other state … any premium or income or other taxes … are imposed upon New Jersey insurance companies … doing business in such other state … which are in excess of such taxes … imposed upon insurance companies … of such other state … doing business in New Jersey … so long as such laws continue in force the same premium or income or other taxes … shall be imposed upon insurance companies … of such other state … doing business in New Jersey.
This retaliatory tax applies solely to foreign (out-of-state) or alien (out-of-U.S.) insurers.
Although the manner of implementation of the statute is not entirely clear from its language, what the statute in effect is intended to do is to permit the imposition of an additional tax on foreign insurers domiciled in states whose premium tax rate exceeds that of New Jersey in an amount equivalent to the difference between the foreign and the New Jersey tax rate. Thus, if, for instance, Ohio imposed a premium tax at a rate of 2.5 percent and New Jersey imposed a premium tax at a rate of 2.1 percent, Ohio-domiciled insurers writing business in New Jersey would be subject to an additional retaliatory tax at a rate of 0.4 percent.
Such retaliatory taxes have now been enacted in all states except Hawaii, and their constitutionality has been affirmed by the U.S. Supreme Court. See Western and Southern Life Ins. Co. v. State Bd. of Equalization of California, 101 S.Ct. 2070 (1981).
In essence, the purpose of retaliatory taxes is to alleviate tax burdens for those companies conducting interstate insurance business by placing pressure on states to lower their tax rates to levels encountered elsewhere, thereby promoting interstate commerce. Their purpose is not to raise revenue.
The state’s retaliatory tax and premium cap provisions thus have different goals: the former is designed to operate so as to level the playing field for insurance companies engaged in interstate business thus encouraging that business; the latter, to give New Jersey a competitive advantage in attracting foreign insurer investment and increased insurance capacity.
New Jersey’s premium tax cap and retaliatory tax statutes do not provide an explicit mechanism for their implementation in instances in which both are applicable, and nothing in the legislative history suggests that the Legislature considered the issues potentially arising from possible variations in the method of their dual implementation.
To illustrate them, if a foreign insurer received premiums of $500,000 on its New Jersey business and was ineligible for the premium tax cap, its premium taxes would be $10,500 (2.1 percent x $500,000).
If a foreign insurer received New Jersey premiums of $500,000 and nationwide premiums of $1 million, thereby qualifying it for New Jersey’s premium tax cap, its taxes would be reduced by $7,875 (12.5 percent of $1 million = 125,000 x 2.1 percent = $2,625; $10,500 – $2,625 = $7,875).
If a foreign insurer, eligible for the benefits of the premium tax cap, is domiciled in a state with a higher premium tax rate than that of New Jersey (assume 2.5 percent), then that insurer should be subject to New Jersey’s retaliatory tax. However, an issue arises as to how that tax should be computed.
The director takes the position that utilization of the premium tax cap reduces the effective rate of New Jersey’s premium taxes below 2.1 percent, since a smaller amount of premiums is being taxed than has actually been written in the state. He then contends that this reduction in New Jersey’s effective tax rate must be recaptured by increasing the rate of retaliatory tax assessed or by applying a retaliatory tax to the full amount of premiums written by the foreign insurer in New Jersey and then subtracting the actual taxes paid pursuant to the cap. Thus, using the prior example of a foreign insurer with $1 million premiums nationwide and $500,000 premiums in New Jersey, subject to a retaliatory tax as the result of a tax rate of 2.5 percent in its state of domicile, the director would calculate the retaliatory tax as $500,000 (total New Jersey premiums) x 2.5 percent (domiciliary tax rate) = $12,500 – $2,625 (New Jersey tax as capped) = $9,875.
Under the director’s interpretation, a partial recapture of the premium tax cap would occur even if the state of domicile of the foreign insurer had a lower tax rate than that of New Jersey (assume 1.8 percent). Using the prior example, the director would calculate the tax payable in the domiciliary state as $500,000 (total New Jersey premiums) x 1.8 percent = $9,000 – $2,625 (New Jersey tax as capped) = $6,375 in retaliatory taxation.
The director does not treat a tax credit in a manner similar to his treatment of the tax cap for retaliatory tax purposes, although the tax cap in many respects resembles a credit, which is the common financial incentive used by states to attract the business of foreign insurers. Unlike his treatment of the cap, he does not seek to apply a retaliatory tax to recapture any credits. Thus, an inconsistency in his position arises for which no sound justification can be discerned.
By calculating the tax using the director’s methodology, the foreign insurer with a domiciliary rate of 2.5 percent loses $7,875 ($9,875 – $2,000). The foreign insurer with a domiciliary rate of 1.8 percent loses $6,375, since it would not otherwise be subject to a retaliatory tax. Accordingly, the benefit of the tax cap is wholly recaptured or significantly reduced. Because a domestic insurer is not subject to New Jersey’s retaliatory tax, no such recapture can occur. Thus, the issues become whether New Jersey’s statutory scheme requires that result and whether that scheme, as applied, is constitutional.
Held: The application of rules of statutory construction by the tax judge to glean legislative intent achieves a counterintuitive result that fails to recognize that the statutes at issue can be jointly applied so as to give effect to the language and purpose of each, and that nothing in statutory history or elsewhere prevents that reconciliation. The retaliatory tax and premium tax cap statutes have wholly different purposes. In his determination to affirm the decision of the director, the tax judge gave effect to the retaliatory tax provisions, while eviscerating the purpose of the premium tax cap.
The premium tax cap statute explicitly and unambiguously states that the premiums of a company eligible for the cap that are taxable in New Jersey “shall not exceed twelve and one-half percentum.” N.J.S.A. 54:18A-6. As the prior example illustrates, the director effectively taxes a higher percentage of premiums, contrary to this statutory language. That result was affirmed by the tax judge. However, a court should strive for an interpretation that gives effect to all of the statutory provisions and does not render any language inoperative, superfluous, void or insignificant.
Additionally, the tax cap statute, as enacted in 1945 and as amended in 1985 and 1989, makes specific reference to its applicability to foreign insurers, as does the 1985 legislative history, quoted previously. It is thus contrary to statutory language and the rules of statutory construction to eliminate the benefits of the cap for most if not all foreign insurers.
That legislative history further demonstrates a concern that the cap not be formulated in a fashion that would be viewed as discriminating against foreign competition either under the Commerce Clause, in 1945, or after the passage of the McCarran-Ferguson Act, under equal protection analysis. An implementation of the retaliatory tax statute so as to recapture the benefits of the premium tax cap solely from foreign insurers appears contrary to analyses of the law circulated at the time of relevant statutory amendments. There is no evidence that the Legislature sought to ignore constitutional concerns, or that they were ignored by the governor in signing the legislation into law.
Further, although it can be presumed that the Legislature was aware of the cap statute when it passed the retaliatory tax law in 1950, there is nothing in the legislative history to suggest that the Legislature was apprised of the director’s position as to the manner of interaction of the two statutes, that the effects of that position were known to affected insurers at any time prior to the submission of the present refund requests � something that occurred several years after the last amendments to the statutes at issue � or that the insurers ever called the anomaly created by the director’s position to the attention of the Legislature. The amounts involved, when viewed individually, were relatively small, and there is no evidence in the record to dispute the fact, asserted by the Ohio Casualty insurers, that because the tax returns were not inspected by them with this problem in mind, its existence was overlooked.
Additionally, there is no recognized practical justification for a construction of the two statutes that would result in the implementation of the retaliatory tax statute at the expense of the premium tax cap. According to the director, the existence of a premium tax cap reduces the effective rate of taxation in New Jersey, increasing the spread between New Jersey’s tax rate and that of any other state, including those states whose tax rate, without consideration of the cap, is equal to or lower than that of New Jersey. The director seeks to recapture this spread through the imposition of increased retaliatory taxes. The tax judge found “the retaliatory tax as calculated by the Director (with the 12.5% cap included in the calculation) can function to encourage other states to lower their tax burdens on New Jersey insurers doing business in those states.” American Fire, 21 N.J. Tax at 171.
However, the imposition of these additional taxes on foreign insurers in this circumstance does nothing to effect the stated purpose of the retaliatory tax statute � to level the playing field or to reduce the incidence of excessive taxes in foreign states while preserving a reasonable level of taxation � since, if the New Jersey retaliatory tax is applied as the director suggests, it would not serve just to reduce high taxes or equalize them, but rather to precipitate a downward spiral in taxation as each state sought to protect its domestic insurers’ interstate operations by lowering the effective rate of taxation. There is no evidence that any legislature has determined that premium taxes should thereby be reduced to a de minimis level, depriving states of a legitimate source of revenue, or that retaliation of the type illustrated was contemplated when retaliatory taxes were conceived as a means of lessening or equalizing tax burdens nationwide.
Further, there is no legitimate purpose to be served by using the retaliatory tax to encourage other states to enact a premium tax cap, thereby lowering their effective rate of taxation. At present, New Jersey is the only state to have enacted such a cap as a means of attracting insurance business to this state. It certainly cannot seek competition among other states for scarce insurance resources through their adoption of a similar mechanism.
Moreover, the result achieved by the director nullifies the purpose of the premium tax cap, in that it removes any incentive on the part of a foreign insurer to write a substantial amount of its business and otherwise invest in the economy of this state.
In a case such as this in which it is evident that the Legislature did not consider the manner of interaction of elements of a statutory taxation scheme, it is essential that the court look to the purposes of the relevant statutes in determining their manner of implementation. There is no rule of statutory construction that requires that the policy goals of one statute be ignored in order to effectuate the purposes of another, if in fact the operation of the two statutes can be reconciled.
Here, the director’s interpretation neither fulfills the stated purpose of the retaliatory tax statute, since it subverts its use as a tax equalization mechanism; acts as a potentially unconstitutional revenue-producing device, contrary to the representations of the industry at the time such statutes were enacted and considered by the U.S. Supreme Court; and further acts to “punish” a class of foreign insurers writing significant business in this state in a manner contrary to the purposes of the statute. The interpretation also fails to effectuate the investment and business-attracting purposes of the tax cap statute, and thus is inconsistent both with the Legislature’s intent and the entire statutory scheme of taxation of insurance premiums.
Adoption of the director’s interpretation is not statutorily required; the harmonization that should be the ultimate goal can be achieved. The retaliatory tax statutes at issue, N.J.S.A. 17:32-15 and 17B:23-5, permit great leeway in determining how they shall be applied, since they are wholly nonspecific as to the manner in which, in the language of N.J.S.A. 17:32-15, the “premium or income or other taxes, or any fees, fines, penalties, licenses, deposit requirements or other obligations, prohibitions or restrictions” imposed by a foreign state or New Jersey are to be calculated or compared.
Thus, the statute can be construed, as plaintiff-insurers argue, so as to compare either the statutory rate of taxes on gross premiums in New Jersey and the foreign domicile in order to determine the amount of the retaliatory tax, before taking the cap into account or the net premiums as taxed in New Jersey and theoretically taxed elsewhere. Indeed, this is essentially what occurs in instances in which foreign insurers are not eligible for the premium tax cap. Thus, both groups of foreign insurers would be treated similarly for purposes of retaliatory taxation. Such an interpretation, unlike that adopted in the Tax Court, would give effect to the purposes of both statutes, while diminishing the effect of neither.
As stated, New Jersey is the sole state to have adopted a tax cap as a means of attracting insurance business. However, decisions elsewhere construing retaliatory tax statutes in light of tax credit provisions aimed at attracting foreign insurance business have reached similar results to those espoused by the insurers here.
The insurers also argue that the manner in which the director has interpreted the retaliatory tax statute, so as to deprive foreign insurers of the benefit of the premium tax cap, unconstitutionally discriminates against foreign insurers in violation of principles of equal protection, thereby creating a constitutional problem that can and should be resolved by adoption of the insurers’ proposed application of the retaliatory tax statute.
The Commerce Clause is not applicable to the business of insurance as the result of the passage of the McCarran-Ferguson Act, 15 U.S.C.A. � 1011 to -15. Further, the Privileges and Immunities Clause of the Constitution, Art. IV, � 2, is inapplicable, because corporations are not held to be “persons” to which that clause applies. As a consequence, modern insurance cases raising issues such as those presented here are decided under equal protection principles.
As already noted, Western and Southern Life Insurance Co. held on equal protection grounds that California’s retaliatory tax provisions did not violate equal protection principles. 101 S.Ct. at 2083-86. That decision, although determined by use of the “rational basis” test traditionally applicable in instances in which no suspect classification is involved, turned in large measure on the recognition that the insurance industry itself had proposed adoption of retaliatory taxes on a nationwide basis, not as a means of producing significant revenue at the expense of out-of-state insurers, but “as a means to apply pressure on other States to maintain low taxes on California insurers.” Id. at 2084. On this basis, the Court held that: “There can be no doubt that promotion of domestic industry by deterring barriers to interstate business is a legitimate state purpose” and “[t]he mere fact that California seeks to promote its insurance industry by influencing the policies of other States does not render the purpose illegitimate.” Id. at 2084. The Court thus found that the purpose of enacting the retaliatory tax � “to promote the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes,” Metropolitan Life Insurance Company v. Ward, 105 S.Ct. 1676, 1681 � was legitimate, and found as well that the California Legislature rationally could have believed that the retaliatory tax would promote its objective.
When New Jersey’s statutory scheme, as applied by the director, is viewed in light of the precedent established by Western and Southern Life Insurance and Ward, its potential constitutional infirmity becomes evident. First of all, that scheme bears no rational relationship whatsoever to the goals of the premium tax cap statute, since it eliminates the incentive of foreign insurers (a category that the statute by its terms was enacted to benefit, along with domestic insurers) to write business and invest in New Jersey and thus constricts the market for insurance in the state and associated investment by foreign insurers here. Moreover, as plaintiff-insurers argue, it subverts the purposes of the retaliatory tax statute by either (1) transforming the statute into a likely forbidden revenue-producing measure, instead of a tax equalization one or (2) inducing a downward spiral of tax rates, thereby depriving the state of needed revenue and potentially harming domestic New Jersey insurers.
The tax judge found that New Jersey’s retaliatory tax, when calculated by applying the 12.5 percent cap, can accomplish the objective of deterring other states from enacting discriminatory or excessive taxes and that it thus both served a legitimate state purpose (influencing the tax burden imposed by foreign states on New Jersey insurers) and the Legislature reasonably could have believed the tax, as calculated, could achieve that purpose.
However, the tax as applied cannot reasonably be expected to produce these results, nor could the Legislature (if it had known of the director’s interpretation, which it apparently did not) reasonably have believed it could.
There is no legitimate purpose in the director’s approach to the two statutes, since that approach, by creating an unjustifiable domestic preference, is purely and completely discriminatory in its application. It is this type of discrimination that Ward found to violate the Equal Protection Clause.
The determination upholding the director’s interpretation of the retaliatory tax statute so as to recoup part or all of the benefits of New Jersey’s premium cap is reversed with the direction that the director recalculate refunds due.
� Digested by Steven P. Bann
[The slip opinion is 42 pages long.]
For appellants: American Fire and Casualty Company et al � Richard D. Pomp, of the Conn. bar, admitted pro hac vice (McDermott, Will & Emery; Pomp and Margaret C. Wilson on the brief); Pruco Life Insurance Company � Michael A. Guariglia (McCarter & English; Open Weaver Banks on the brief). For respondent � Carol Johnston, Senior Deputy Attorney General (Peter C. Harvey, Attorney General; Michael J. Haas, Assistant Attorney General, of counsel).
