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Tony Roehl, Esq.
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All states, except for Oregon, subject insurance companies to premium taxes, with most states imposing premium taxes in lieu of income taxes.[1] These taxes range from 0.5% to 4.35%, with an average of 2%.[2] Because of the different rates, most states have also enacted retaliatory legislation. A typical retaliatory tax statute requires that a foreign insurer be taxed at a higher rate than a domestic insurer, if the foreign insurer’s domicile state has a higher premium tax.[3]  A retaliatory tax is therefore, on its face, a discrimination against insurers domiciled in a state with a high premium tax rate, regardless if all insurers in the other state are all taxed at the same rate.  All insurance regulation is subject to state law by virtue of the McCarran-Ferguson Act, which removed the business of insurance from the scope of federal regulation.

The tension between state and federal regulation of the insurance industry reaches as far back as the Civil War.[4] Insurance was deemed to be outside of the scope of federal regulation until a drastic change in 1944 placed it back within the meaning of interstate commerce. The Supreme Court held that Congress may regulate insurance through its Commerce Clause powers.[5] In the aftermath of that decision, Congress passed the McCarran-Ferguson Act which explicitly placed the business of insurance back in the realm of state law.[6]

Although the Supreme Court has thus far upheld retaliatory taxes as constitutional under the Equal Protection Clause and the Commerce Clause, it has done so through flawed reasoning and insufficient scrutiny of the motivations behind a retaliatory tax. Retaliatory taxes should be struck down under at least three grounds: the Commerce Clause, the Equal Protection Clause, and through a parens patriae suit. First, the McCarran-Ferguson Act should not be construed to allow for discriminatory legislation, but rather should only be construed to mean what it says: to place the regulation of the business of insurance with the states. Second, states that enact retaliatory legislation do not have a legitimate state interest in what essentially is an attempt to regulate other states’ fiscal policies, which violates the Equal Protection Clause. Third, states may bring a parens patriae suit to recover for direct economic harm they have suffered as a result of retaliatory tax legislation. This article explores each of these avenues, and argues that the Supreme Court should find state retaliatory taxes schemes unconstitutional.

I. Retaliatory Tax Jurisprudence

A. Pre-McCarran-Ferguson

The first Supreme Court case addressing insurance regulation, Paul v. Virginia, came in 1868 when the Court held that insurance was “not a transaction of commerce” and was thus outside of the scope of federal regulation.[7] Although the type of tax that was upheld in Paul has now been found unconstitutional,[8] the holding set the stage for the ongoing debate between federal and state regulation of insurance. The Court’s reasoning was based on two main arguments. First, a Privileges and Immunities Clause challenge under the Fourteenth Amendment was not possible, as corporations were not individuals. Second, the Court reasoned that the business of insurance was not a transaction of commerce, and therefore outside of Commerce Clause regulation.[9]

Almost two decades later, the Court applied this rule in the context of a retaliatory tax statute.[10]  In Fire Ass’n of Philadelphia v. New York, a Pennsylvania-domesticated fire insurance company established an agency in New York refused to pay retaliatory taxes on the premiums received within the state of New York.[11] The Court upheld the tax as constitutional, based on the precedent set in Paul, that a Privileges and Immunities challenge was not possible because corporations were not individuals and therefore not protected by the Fourteenth Amendment.[12]

The legal foundations on which Paul and Fire Ass’n of Philadelphia were decided began eroding in 1910, when the Court recognized that corporations should be protected by the Equal Protection Clause. In Southern Ry. Co. v. Greene, the Court held “that to tax the foreign corporation for carrying on business . . . by a different and much more onerous rule than is used in taxing domestic corporations for the same privilege, is a denial of the equal protection of the laws.”[13] The Court followed the same principle in Hanover Fire Ins. Co. v. Harding, where it held that “a foreign corporation stands equal and is to be classified, with domestic corporations of the same kind.”[14] This new evolving principle was reiterated that same year in Frost v. R.R. Comm’n of State of California.[15] Although briefly interrupted in the mid-1940s[16], this rule remains the law.

It is significant to note that these three cases from 1910 and 1926 did not address retaliatory tax law, but rather laws that placed direct monetary conditions on businesses operating in a state. The constitutionality of retaliatory taxes under the Equal Protection Clause had not been challenged thus far. In addition, none of those cases challenged the notion that the regulation of insurance is outside the scope of federal jurisdiction.

The issue of insurance taxation was put to rest for almost 20 years, until 1944 when the Court decided United States v. South-Eastern Underwriters Association. The court overturned the long-established rule that the regulation of insurance should be left up to the states, and instead placed it within the scope of the Commerce Clause.[17] To counteract the effects of the Court’s decision, Congress enacted the McCarran-Ferguson Act in 1945. This piece of legislation would ensure that states, and not federal government, would be the ones to regulate the business of insurance.[18]

B. Post-McCarran-Ferguson

After Congress enacted the McCarran-Ferguson Act, the constitutionality of retaliatory taxes lay unchallenged for almost four decades. In 1981, the Supreme Court in Western and Southern Life Ins. Co. v. State Board of Equalization of California upheld California’s retaliatory tax legislation.[19] The statute imposed a higher premium tax on a foreign corporation if that foreign corporation’s state had higher premium taxes than California’s. The Court dismissed any Commerce Clause challenges, concluding that Congress removed all Commerce Clause limitations on the authority of the States to regulate and tax the business of insurance when it passed the McCarran-Ferguson Act.[20] The Court also rejected an Equal Protection challenge, finding that a state may “make reasonable classifications” as long as the California legislature could rationally have believed it was related to a legitimate state purpose.[21] The Court concluded that the retaliatory tax was constitutional and accepted California’s argument that the tax rationally related to the state’s interest in “promoting the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes.”[22] The Court reasoned that the purpose of the retaliatory tax “was to apply pressure on other States to maintain low taxes on California insurers.”[23]

Four years later, the Court addressed a second challenge to a retaliatory tax statute.  In Metropolitan Life Ins. Co. v. Ward, Alabama’s disparate tax rates were challenged under the Equal Protection Clause.[24] The tax imposed in Metropolitan Life Ins. Co. was a lower premium tax rate on domestic companies than foreign ones, without first looking at whether the foreign corporation’s home state had a higher premium tax.[25] The State of Alabama justified the tax differential as a way to promote its domestic insurance industry.  However, unlike in Western and Southern, the Court struck down the challenged tax as unconstitutional because the statute violated the Equal Protection Clause.[26] The Court emphasized that a state may not tax a foreign corporation at a higher rate solely based on its residence unless a legitimate state purpose can be shown.[27] The Court held that the statute’s purpose was not legitimate because it was “purely and completely discriminatory, designed only to favor domestic industry within the State, no matter what the cost to foreign corporations also seeking to do business there.”[28]

II. Why Retaliatory Taxes Are Unconstitutional

A. Interpretation of the McCarran-Ferguson Act and the Commerce Clause

The historical context in which the McCarran-Ferguson Act (“Act”) was enacted is important to understanding its intent, and how it should be interpreted. As aforementioned, the Act was passed as a direct response to the Court’s decision in South-Eastern Underwriters Association. What is significant to note, is that South-Eastern Underwriters was decided just two years after the Supreme Court’s monumental decision in Wickard v. Filburn.[29] In Wickard, the Court dramatically expanded the meaning of interstate commerce and expanded what Congress can control under the Commerce Clause using the rational basis test. The Court held that Congress may regulate even purely local activity, as long as the activity has a “substantial economic effect on interstate commerce.”[30] Furthermore, the Court noted that when determining if an economic activity has a substantial effect on interstate commerce, courts should look to whether such activity in the aggregate would have a substantial effect. Courts need not look to the challenged activity in isolation.[31] After this decision, many were concerned that Congress suddenly possessed unlimited power to control all aspects of commercial dealings. [32] Some viewed it as an outright removal of any limitations on federal regulation.

Because of these concerns, Congress had to act after South-Eastern Underwriters. The central concern after South-Eastern Underwriters was the placement of insurance regulation in the hands of the federal government; therefore, the McCarran-Ferguson Act attempted to reverse and restore the status quo of state regulations.  In fact, according to the Federal Trade Commission, “even the most cursory reading of the legislative history of the McCarran-Ferguson Act makes it clear that its exclusive purpose was to counteract any adverse effect that this Court’s decision in U.S. v. South-Eastern Underwriters Assoc. might have on state regulation of insurance.”[33]

Thus, the sole purpose of the McCarran-Ferguson Act was to correct what South-Eastern Underwriters caused. And that is, to “preserve the rights of the states to control and regulate the insurance business within the states and to collect the taxes now permitted.[34] Moreover, South-Eastern Underwriters did not address a retaliatory tax statute; therefore, the Act could not have been an attempt to include in its scope discriminatory and retaliatory tax statutes. Even now the McCarran-Ferguson Act does not exempt federal regulation in the face of boycott and other antitrust violations. The Act does not purport to remove all federal regulation, contrary to what the Court in Western and Southern suggested.[35]

A House Report expressing Congressional intent in passing the McCarran-Ferguson Act makes it clear that “it was not the intention of Congress in the enactment of the Act to clothe the States with any power to regulate or tax the business of insurance beyond that which they had been held to possess prior to the decision in Southeastern Underwriters Association.”[36] Instead, the Act provides for the continued regulation and taxation of insurance by the States, subject always, to the limitations set out in the controlling decisions of the United States Supreme Court.[37] In addition, “legislative history makes it clear that Congress did not intend one state, even the insurance company’s home state, to control those aspects of its business which affects many states or an industry as a whole.”[38] The law of a single state cannot take from the residents of every other state federal protection. Instead, the McCarran-Ferguson Act only protects “regulation by the state in which the activity is practiced and has its impact.”[39] If it was not evident back in the 1980s, it is evident now that, as applied, retaliatory taxes have the effect of controlling the fiscal policy decisions of other states.

The question therefore is: what are those long-established limits on a state’s taxation power? The first “firm peak of decision which remains unquestioned” is the notion that a state cannot “impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.”[40] The Court has consistently held that “taxing in a manner that discriminates between two types of interstate transactions in order to favor local commercial interests over out-of-state businesses . . . is constitutionally impermissible.”[41] The second unchanging rule is that “simple economic protectionism” is to be struck down under a “per se rule of invalidity.”[42] Keeping in line with one of the canons of statutory interpretation, courts should adhere to the plain meaning of the statute and only construe a statute more broadly if the language or structure permits it. Thus, the McCarran-Ferguson Act should not be construed to undermine such fundamental principles in light of a lack of express language to the contrary. 

B. Equal Protection Challenge

A state may not impose unconstitutional conditions on foreign corporations “at its unfettered discretion.”[43] Thus, “although the McCarran-Ferguson Act exempts the insurance industry from Commerce Clause restrictions, it does not purport to limit in any way the applicability of the Equal Protection Clause.”[44] The Supreme Court held in Metropolitan Life Insurance v. Ward that “a State may not constitutionally favor its own residents by taxing foreign corporations at a higher rate solely because of their residence.[45] Through a typical retaliatory tax statute, the state is doing exactly that. In a more recent 2005 case, Am. Fire & Casualty Co. v. N.J. Div. of Taxation, the New Jersey Supreme Court found that the state Director of Taxation’s interpretation of the retaliatory tax statute was inconsistent with the legislature’s intent because it created an “unjustifiable domestic preference in violation of the Equal Protection Clause.” [46]

A constitutional challenge can be brought on a “facial” or “as applied” basis, and such taxes are at the very least unconstitutional once applied. Even if facially, the state’s purpose is to “promote the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes,” two flaws in that reasoning show that a tax akin to the one in Western and Southern, deemed constitutional, and one akin to a tax in Metropolitan Life Insurance, deemed unconstitutional, are in fact one in the same once applied.[47]

First, the Supreme Court has glossed over the fact that retaliatory tax statutes are not trigged if the foreign corporation’s domicile state has discriminatory taxes,[48] but rather if the foreign corporation’s domicile state has merely higher taxes. Therefore, a purported purpose of eliminating “discriminatory” taxes quickly disappears once the statutes are actually applied.  Second, the interest of eliminating excessive taxes also reveals itself to be nothing more than a truism. Decisions as to taxing and budgeting are by definition local issues. A third party state’s tax cannot be “excessive” because a state has unilaterally deemed it so. States have different fiscal needs and are permitted to decide how to best address those needs without being subject to discrimination.[49]

Once those purported interests are stripped away, what is left is pure economic protectionism and discrimination solely based on an insurer’s state of domicile.  As Justice Stevens stated in Western and Southern, “the mere difference in residence is . . . an insufficient reason for disparate treatment.”[50] In fact, legislatures admit that the purpose of passing retaliatory taxes is to coerce other states into adopting an identical taxing rate: such blatant coercion has never been held to be legitimate.[51]

Furthermore, retaliatory taxes are antithetic to state sovereignty: the administration of a state’s budget allows a state to enact policies best suited for its residents. Retaliatory taxes allow foreign states to control aspects of local policymaking which they have no legitimate interest or right.  In fact, the purpose of the McCarran-Ferguson Act was to enact the opposite result and so ensure that states and local governments could regulate their own taxation policies. Nothing in the Act intended to allow states to regulate, in its effect, other states.  Premium taxes are factored into insurer rate filings, so if one state has a higher premium tax the net effect is that its residents pay more in premiums.  There is no extra-territory effect on insurers domiciled in other states since the premium tax stops at a state’s border.     

Lastly, empirical studies have shown that retaliatory taxes are not effective because each state has different regulations and systems of taxation.[52] In addition, retaliatory taxes are not applied uniformly. They are applied arbitrarily, making their effects unpredictable.[53] 

C. Parens Patriae: A State-Initiated Suit

A third avenue of bringing a challenge against retaliatory taxes is a parens patriae suit. A state may assume its role as parens patriae to vindicate the rights of its citizens, and at the same time, protect its own economic well-being.[54] Retaliatory taxes significantly harm the economy of a state, making it choose between foregoing business opportunities and changing its budget to the detriment of its citizens. Private suits against retaliatory have thus far been unsuccessful and it is unlikely that corporations will spend its money on litigation that has proven to be futile and which provides a limited corresponding economic benefit. Therefore, a parens patriae suit may be an effective way of challenging retaliatory taxes.

In order to bring a parens patriae suit, the interest the state is seeking to protect must be different and independent from its citizens’ interests. To bring a parens patriae suit, a state must have quasi-sovereign interests: what a quasi- sovereign interest is “can evolve and change with time, and as such it is a definition that is conducive to a case-by-case analysis.”[55] A sufficient interest includes direct damage to a state’s economy.[56]

Courts have consistently found that the “promotion of domestic industry by deterring barriers to interstate business is a legitimate state concern. The Supreme Court has recognized the legitimacy of state efforts to maintain the profit level of a domestic industry . . . and of efforts to ‘protect and enhance the reputation’ of a domestic industry so that it might compete more effectively in the interstate market.”[57] Retaliatory tax legislation has the direct effect of curbing a state’s business opportunities by discouraging companies from making states with higher premium taxes their domicile and a state may sue another state to protect its corporate citizens. 


Any distinction between the tax in Western and Southern and the tax in Metropolitan Life Insurance is meaningless; whether a law is facially discriminatory or discriminatory in effect has never been a determinative factor. In either case, it is clear that retaliatory tax statutes lack any reasonable basis or legitimate state purpose and therefore violate the Equal Protection Clause. If the Supreme Court compared the effect of retaliatory statutes, it will find that ultimately both of those taxes have one central feature in common: both are triggered by the residence of a foreign corporation. Such discrimination is antithetic to the fundamental principle of free trade, which has been the basis for this entire nation. 

I wish to thank Maria Kachniarz, Associate in MMM's Washington, DC Office, and Jennifer Lee, Summer Associate and University of North Carolina School of Law class of 2020, for their assistance in researching and drafting this article.


1 Jim Hall, Bob Montellione, Jim Williams, State Taxation of the Insurance Industry, NCSL Task Force on State and Local Taxation (August 19, 2014), Industry.pdf.

2 Id.

3 See, e.g., O.C.G.A. § 33-3-26(a) (2008) (“When by or pursuant to the laws of any other state or foreign country any taxes, licenses, and other fees in the aggregate and any fines, penalties, deposit requirements, or other material obligations, prohibitions, or restrictions are or would be imposed upon Georgia insurers or upon the agents or representatives of such insurers which are in excess of such taxes, licenses, and other fees in the aggregate or which are in excess of the fines, penalties, deposit requirements, or other obligations, prohibitions, or restrictions directly imposed upon similar insurers or upon the agents or representatives of such insurers of such other state or country under the statutes of this state, so long as such laws of such other state or country continue in force or are so applied, the same taxes, licenses, and other fees in the aggregate or fines, penalties, deposit requirements, or other material obligations, prohibitions, or restrictions of whatever kind shall be imposed by the Commissioner upon the insurers or upon the agents or representatives of such insurers of such other state or country doing business or seeking to do business in Georgia. Any tax, license, or other fee or other obligation imposed by any city, county, or other political subdivision or agency of such other state or country on Georgia insurers or their agents or representatives shall be deemed to be imposed by such state or country within the meaning of this Code section.”).

4 Call Armstrong Laws Conspicuously Unwise, New York Times (August 14, 1906) (“More people are concerned with insurance than any other public institution and public interest in it is intense.”).

5 See United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533, 552 (1944) (superseded by statute) (holding that regulation of insurance is within Congress’s authority). 

6 See 15 U.S.C.A. 1012(a) (1947) (“The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.”).

7 See Paul v. Virginia, 75 U.S. 168 (1868).

8 See id. at 181 (holding that a state may impose any conditions whatsoever on a foreign corporation, including “may exclude a foreign corporation entirely” at its discretion).

9 See generally Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869 (1985).

10 See Fire Ass’n of Philadelphia v. New York, 119 U.S. 110 (1886) (upholding New York’s retaliatory tax statute as constitutional). 

11 Id. at 111.

12 See id. at 112 (upholding Paul’s holding regarding corporations and their lack of status as protected individuals).

13 Southern Ry. Co. v. Greene, 216 U.S. 400, 418 (1910).

14 272 U.S. 494, 511 (1926).

15 271 U.S. 583, 593 (holding that a state may not impose “conditions which require the relinquishment of unconstitutional rights”).

16 See generally Lincoln Nat. Life Ins. v. Read 325 U.S. 673 (1945) (holding that a state may impose any conditions whatsoever on foreign corporations). 

17 See United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944) (holding that an insurance company, which conducts a substantial part of its business transactions across state lines, is engaged in "commerce among the several States," and as such, under the Commerce Clause insurance can be regulated by the federal government).

18 See 15 U.S.C. 1012 (1947) (“The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.”).

19 451 U.S. 648, 650 (1981) (holding that California’s retaliatory tax does not discriminate against foreign insurers therefore being in violation of the Commerce Clause).

20 Id. at 653.

21 Id. at 657. 

22 Id. at 668.

23 Id. at 670.

24 See generally 470 U.S. 869 (1985).

25 Id

26 Id.

27 Id at 883.

28 Id. at 869.

29 See generally 317 U.S. 111 (1942).

30 Id at 125.

31 Id. at 127.

32 Perverted Liberty: How the Supreme Court’s Limitation of the Commerce Power Undermines Our Civil-Rights Laws and Makes Us Less Free, 41 Cap. U. L. Rev. 49, 65 (2013).

33 Federal Trade Commission, American General Insurance Company, 81 F.T.C. 1052, 1972 WL 128891 (1972) citing Maryland Casualty Co. v. Cushing, 347 U.S. 409, 413 (1954).

34 Cong Rec. 1092 (Mr. Springer).

35 451 U.S. 648, 653 (1981) (finding that the McCarran-Ferguson Act removed all limits of the Commerce Clause).

36 House Report No. 143, 79th Congress (emphasis added).

37 Id.

38 Federal Trade Commission, American Insurance Company 81 F.T.C. 1052, 1972 WL 128891.

39 F.T.C. v. Travelers Health Assoc., 362 U.S. 293, 296 (1960).

40 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458 (1959).

41 Boston Stock Exchange v. State Tax Commission, 429 U.S. 318, 335 (1977).

42 Philadelphia v. New Jersey, 437 U.S. 617, 623-624 (1978).

43 See Wheeling Steel Corp. v. Glander, 337 U.S. 562 (1949); Western and Southern Life Insurance Co. v. State Bd. of Equalization of Cali., 451 U.S. 648, 666 (1981).

44 Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869, 880 (1985).

45 Id. at  878 (1985) (citing WHYY, Inc. v. Glassboro, 393 U.S. at 119-120; Wheeling Steel Corp. v. Glander, 337 U.S., at 571; Hanover Fire Ins. Co. v. Harding, 272 U.S. at 511; Southern R. Co. v. Greene, 216 U.S., at 417). 

46 Am. Fire & Casualty Co. v. N.J. Div. of Taxation, 868 A.2d 346, 362 (NJ 2005).

47 Western and Southern Life Insurance Co. v. State Bd. of Equalization of Cali., 451 U.S. 648, 668 (1981) (emphasis added).

48 I.e., statutes that tax foreign corporations more than domestic corporations solely by virtue of them being foreign corporations.

49 Western and Southern, at 675-676.

50 Id. at 676-77 (J. Stevens, dissenting).

51 Id. at 676 (J. Stevens, dissenting).

52 Pelletier, Insurance Retaliatory Laws, 39 Notre Dame Law. 243, 254 (1964).

53 See Petition for Certiorari in First American Title Insurance Co. v. Combs, 15-16 (2008) (discussing that constitutional challenges are often brought against retaliatory taxes, as states often times interpret them inconsistently).

54 See generally Missouri v. Illinois, 180 U.S. 208, 241 (1901).

55 Claudine Columbres, Targeting Retail Discrimination with Parens Patriae, 36 Colum. J.L. & Soc. Probs. 209, 221 (2003); See also Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251 (1972).

56 Claudine Columbres, Targeting Retail Discrimination with Parens Patriae, 36 Colum. J.L. & Soc. Probs. 209, 222 (2003).

57 Western and Southern, at 671.