Insurance stamp duties are “economically destructive” and should be replaced with a broad-based property levy, according to the Grattan Institute of Australia.

Their recent report argues insurance-based fire and emergency services levies and taxes should be dropped as part of wider tax reforms.

Fire insurance levies – now only imposed in NSW and Tasmania, raising a total of about $900 million – exact the third biggest loss in economic activity, the report says.

KMPG modelling cited in the report says a one dollar rise in fire insurance levies costs the economy just under 40 cents.

“There is a big prize for tax reform,” the report says. “All taxes drag on economic growth, but some are worse than others.

“State governments rely too much on taxes that reduce growth more. Making state taxes more efficient would boost economic growth.”

Compared to other countries, taxes on insurance in Australia are relatively high. of the OECD–10 looked at, only Australia, New Zealand and Japan applied a value-added tax such as GST to insurance contracts.

For the fire services levy, the process for determining the appropriate recovery on each insurance product can be complex for insurance companies.

The insurance industry has long argued for the abolition of taxes on insurance, calling it inefficient and a deterrent to encouraging consumers and businesses to adequately protect their assets.

The Grattan Institute agrees with the industry’s assessment. “Taxes on insurance deter people and businesses from purchasing an adequate level of insurance, leaving them exposed to risks such as the risk of flood or fire damage to their own home or businesses assets, or motor vehicle theft.

“Low-income earners are also the most likely to not purchase insurance, or to underinsure themselves".

“The burden of these taxes falls on those who prudently take out insurance, while the uninsured who do not contribute often receive public assistance.”

"By encouraging under-insurance or non-insurance, insurance taxes may also lead to an increase in government expenditure in the event of a disaster."

"There is little justification for levying specific taxes on insurance products. Rather than correcting a market failure, insurance taxes can add to existing problems in the insurance market. The revenue from insurance taxes should be replaced by revenue from a more efficient and equitable tax."

 

 - insuranceNEWS