By James Moore
Tuesday, March 8, 2022 | 0
We received a question via email from a local college junior: Is workers’ compensation insurance regressive or progressive, similar to our income tax system? The student was writing a research paper assessing whether workers’ compensation insurance was just another tax imposed on employers as part of their business activities.
First, we love to hear from students and help them find worker compensation data or articles that will help them complete an assignment. We ended up hiring two students as interns who had questions like this.
Some employers view workers’ compensation insurance as a tax on doing business. I wrote a few articles, including this oneabout this prospect.
A regressive levy or tax means that everyone pays the same amount, regardless of income. This type of system tends to overtax low earners relative to high earners. A regressive tax is applied uniformly to all businesses and all workers.
Is work injury insurance regressive? No, because the rates are not necessarily applied in the same way to all companies. On the surface, when looking at the loss cost sheets from the various rating offices (pure premium rate in California), it appears to be regressive. Small businesses pay the same rates as large businesses.
Is workers’ compensation insurance progressive? The US tax system is progressive. Just look at a tax bracket to see that the more money a person or business makes, the higher the tax rate. The draft table below shows the upcoming graduated tax rates for 2022 from the Internal Revenue Service website.
Marginal rates: For the 2022 tax year, the top tax rate remains 37% for single taxpayers with incomes over $539,900 ($647,850 for married couples filing jointly).
The other prices are:
- 35%, for income over $215,950 ($431,900 for married couples filing jointly).
- 32% for income over $170,050 ($340,100 for married couples filing jointly).
- 24% for income over $89,075 ($178,150 for married couples filing jointly).
- 22% for income over $41,775 ($83,550 for married couples filing jointly).
- 12% for income over $10,275 ($20,550 for married couples filing jointly).
- 10% for income of $10,275 or less ($20,550 for married couples filing jointly).
My assessment would be that the answer to the question of whether workers’ compensation insurance is regressive or progressive is that workers’ compensation insurance has elements similar to both. The huge difference is the element of risk involved with a small business versus a large business.
Why Worker’s Compensation Insurance Is Neither
Workers’ compensation would be closer to a regressive tax system. The price per unit of risk decreases as the wage bill increases. Without diving into worker rating formulas, the level of risk in a large company can be spread over more payroll.
The Worker’s Compensation Rating Board formulas all take into account that an accident at a small employer does not have enough payroll to spread the risk of a single accident.
Pricing formulas support this risk by charging more per unit of risk. Yes, the rates may look the same, but experience mod formulas take care of that by assessing a higher risk for a small employer than a larger one with a few claims.
Example: A $250,000 accident with a payroll of $200,000 (similar small employer) versus the same $250,000 accident with a payroll of $3.5 million (larger employer).
The regressive versus progressive comparison cannot be a tax, due to risk factors for each employer. Taxes do not take risk into account in almost all cases.
This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.