Moore: Is Workers' Comp Insurance Regressive or Progressive?

Tuesday, March 8, 2022 | 0

We received an emailed question 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 workers' compensation insurance was just another tax on employers when conducting their business operations.

James Moore

First, we love to hear from college students and 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 as interns who had questions such as this.

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. 

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 cost sheets from the various rating bureaus (pure premium rate in California), it does seem to be regressive. The smaller companies pay the same rates as larger companies.

Is workers' comp insurance progressive? The U.S. tax system is progressive. One only has to look at a tax bracket to see that as someone or a company earns more money, the rate of taxes increases. The rough draft table below shows the upcoming progressive tax rates for 2022 from the Internal Revenue Service's 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).
• 10% for incomes 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' comp insurance is regressive or progressive is that workers' compensation insurance has similar elements to both. The huge difference is the element of risk involved with a smaller versus 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 payroll increases. Without delving into the workers' comp rating formulas, the level 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 at 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 take care of this by assessing a higher amount of risk to a smaller employer than a larger one with a few claims.

Example: a $250,000 accident with $200,000 of payroll (smaller similar employer) versus the same $250,000 accident with $3.5 million in payroll (larger employer).

The regressive versus progressive comparison cannot be a tax, due to factors of risk for each employer. Taxes do not address risk in almost all instances.

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.