Workers Comp Insurance Regressive or Progressive When Compared To Taxes?
We received an emailed question this week from a Junior at a local college. Is Workers Comp insurance regressive or progressive similar to our income tax system? The student was writing a research paper assessing whether or not workers compensation insurance was just another tax on employers when conducting their business operations.
Firstly – we love to hear from college students to assist them in finding any workers comp data or articles that will help them complete an assignment. We ended up hiring two college students that had questions such as this as interns.
Some employers do think of workers comp insurance as a tax of doing business. I wrote a few articles including this one concerning that outlook.
Is Workers Comp Insurance Regressive? – looking at premiums paid
A regressive fee or tax means that everyone pays the same amount regardless of income. This type of system tends to overtax the lower wage earners compared to the higher wage earners. A regressive tax is applied uniformly to all companies and workers.
Is Workers Comp insurance regressive? No, as the rates are not necessarily applied in the same manner to all companies. On the surface, when looking at the Loss Costs Sheets from the various rating bureaus (pure premium rate in CA), do seem to be regressive.
The smaller companies pay the same rates as larger companies. The last section will cover why workers comp is not the same as regressive taxes to an employer.
Is Workers Comp Insurance Progressive?
The US tax system is a progressive system. One only has to look at a tax bracket to see that as someone or a company earns more money their rate of taxes increases. The rough draft table below shows the upcoming progressive tax rates for 2022 from the irs.gov website.
Marginal Rates: For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
The other rates are:
35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
32% for incomes over $170,050 ($340,100 for married couples filing jointly);
24% for incomes over $89,075 ($178,150 for married couples filing jointly);
22% for incomes over $41,775 ($83,550 for married couples filing jointly);
12% for incomes over $10,275 ($20,550 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
Workers Comp is not necessarily a progressive tax rate.
My assessment would be that answer to the questions of whether workers comp insurance is regressive vs. progressive is that workers compensation insurance has similar elements to both. The huge difference is the element of risk involved with a smaller vs. larger company.
Why Workers Comp Insurance Is Neither
Workers Comp would be closer to a regressive tax system. The price per unit of risk does decrease as the amount of payroll increases. Without delving into the Workers Comp rating formulas, the amount of risk in a larger company can be spread across more payroll.
The Workers Compensation rating bureau formulas all take into account that one accident in a smaller employer does not have enough payroll to spread the risk out of even one accident.
The rating formulas take care of this risk by charging more per unit of risk. Yes, the rates may look the same, but the Experience Mod formulas on the E-Mod sheets take care of this by assessing a higher amount of risk to a smaller employer than a larger one with a few claims.
For example – a $250,000 accident with $200,000 of payroll (smaller similar employer) vs the same $250,000 accident with $3.5 million in payroll (larger employer).
The Workers Comp insurance regressive vs. progressive comparison cannot be a tax due to factors of risk for each employer. Taxes do not address risk in almost all instances.
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