MARVIN MANDEL, Governor                       4017

Appendix to this Message. Eight States currently have
domestically chartered insurance companies doing a
significant volume of business beyond the borders of
their home State. Seven States impose a tax of between 2
1/2% and 3%; eight impose a tax of more than 2% but less
than 2 1/2%; and the rest tax premiums at 2%.

All but two States (Hawaii and New Mexico) have, in
addition to the regular premium tax, a form of
retaliatory tax. Although the wording of these
retaliatory provisions varies from State to State, their
effect is substantially the same; namely, to assess a
higher tax against every company whose home State imposes
taxes which are, in the aggregate, higher than the taxes
imposed by the retaliating State, These retaliatory
taxes can be traced back at least to the 1850's. Their
purpose was to "demand equality for treatment for
insurance companies of one state when they do business in
a foreign state, and impose the same burdens and
exactions on insurance companies from the foreign state
if this equality is refused." See Insurance Retaliatory
Laws, George A. Pelletier, Jr., 39 Notre Dame Lawyer 243
(1964). See also State Ins. Commr. v. Nationwide Mut.
Ins. Co., 241 Md. 108 (1966); State ex rel. O'Brien v.
Continental Ins. Co., 67 Ind. App. 536, 116 N.E. 929
(1917); Atlantic Insurance Co. v. State Board of
Equalization, 62 Cal. Rptr. 784 (1967).

The fact that all but fifteen States impose a tax of
2 1/2% or less illustrates how successful these
retaliatory provisions have been in creating and
maintaining similarity in the tax rates among the various
States. Although I seriously question the rationale and
need for these provisions in today's world and, in fact,
believe them to be an unconscionable restraint on the
State's taxing power and fiscal integrity, I cannot
contest either their existence or effect. When, in 1941,
Maryland last increased its premium tax (from 1 1/2% to
2%) , the three States which then had tax rates lower than
2% immediately invoked their retaliatory provisions; and
I have no reason to suspect that the forty-two States
currently having rates below 3% would not do the same
thing. The Insurance Commissioner has, in fact, advised
me that, based upon conversations with his counterparts
in other States, it is his judgment that the retaliatory
taxes will be imposed by these other States should House
Bill 855 become law.

As a result of these concerns, I called the General
Assembly into Special Session to reconsider this
particular method of funding the appropriation. To its
credit, the Legislature, in Special Session, swiftly
enacted Senate Bill 1, which re—enacted the appropriation
and funded it on a more equitable basis.