Lansing — Michigan auto insurance companies reaped an unintended multimillion-dollar tax credit windfall through a 2012 change in state law and now are battling lawmakers to keep what one critic calls “the most lucrative handout ever.”

In 2012, the Legislature transferred administration of a program that covers the medical costs of individuals injured in accidents involving uninsured drivers to a quasi-governmental entity that serves as Michigan’s insurer of last resort for motorists who can’t buy traditional insurance.

Combining the two entities allowed auto insurance companies to claim a tax credit on the assigned claims of passengers and pedestrians injured by uninsured drivers — a tax code benefit previously not available to them when the program was administered by the Secretary of State’s Office. As a result, the insurers got a new tax break that is projected to deplete the state’s general fund by $60 million this year and $80 million in the 2017 fiscal year.

The tax credit for auto insurers is in the cross-hairs of House Appropriations Committee Chairman Al Pscholka, who argues the state’s $10 billion budget is “structurally out of balance” because of the tax credit, which he calls an “inadvertent mistake” by lawmakers.

“This is a corporate handout that they’re trying to protect,” said Pscholka, R-Stevensville. “This creates another hole in the budget.”

The insurance industry lobby, business groups and the conservative political group Americans for Prosperity Michigan have defended the credit, arguing that repealing it would result in a $40 per vehicle “car tax” on drivers.

“Anybody who thinks that insurance companies don’t pass along expenses like that is crazy,” said former state Rep. Pete Lund, executive director of Americans for Prosperity Michigan. “It’s the nature of doing business — when government gives you more expenses, you pass it along (to customers) in higher prices.”

Lund, a Shelby Township Republican, was chairman of the House Insurance Committee when the law was changed. He now supports auto insurers claiming the tax credit to cover some of the costs they shoulder caring for uninsured accident victims.

“I think it should be paid for by the state, because it’s really an extension of Medicaid; it’s a welfare program more than an insurance program,” Lund said.

Gov. Rick Snyder’s proposed 2018 fiscal year budget assumes lawmakers will eliminate the tax credit and restore the $80 million in revenue for the state’s $10 billion general fund.

“We need to correct that,” Snyder said Monday at an event in Harrison Township.

Looking to contain costs

As part of Michigan’s no-fault auto insurance law, uninsured individuals hit by an uninsured driver or injured as a passenger in that person’s vehicle are entitled to an unlimited medical benefit.

The Michigan Assigned Claims Plan doles out the medical bills to individual auto insurers doing business in Michigan.

From 2008 to 2013, the annual medical costs associated with uninsured drivers exploded by 63 percent. Between 1998 and 2013, the cost to insurers rose five-fold to $226.7 million, according to data from the Michigan Automobile Insurance Placement Facility.

The auto insurance industry was looking for a new way to contain rising costs when it lobbied for the change, said Pete Kuhnmuench, executive director of the Insurance Institute of Michigan, the auto insurance industry’s lobbying arm.

“It was essentially being sold as an administrative change,” said David Zin, chief economist at the nonpartisan Senate Fiscal Agency.

Lawmakers transferred the assigned claims program to the Michigan Automobile Insurance Placement Facility in 2012 because that organization is the state’s insurer of last resort and has experience handling medical claims, said Terri Miller, general manager of the MAIPF.

In 2015, MAIPF paid out $242 million in assigned claims medical costs, a 7 percent increase over two years, Miller said.

“It wasn’t designed to secure a tax credit or anything like that; it was simply for efficiency purposes,” Kuhnmuench said.

But lawmakers and legislative analysts did not realize the resulting law change would entitle insurers to claim a new tax credit and nobody raised any concerns about it four years ago, Zin said.

“Whether this was true for folks in the auto industry and they just kept their mouth shut, I don’t know,” the Senate analyst said.

Kuhnmuench said the industry group did inform then-state Insurance Commissioner Kevin Clinton that in-state companies would be eligible for the credit.

“We discovered that possibility maybe halfway through the process,” Kuhnmuench said of the tax code consequences.

Clinton, who later became state treasurer, “ran it up the flag pole” to the governor’s office and there was no resistance then to expanding an existing tax credit, the auto insurance lobbyist said.

“I find it interesting I’m being blamed for cuts to education and cuts to this, that and the other,” Kuhnmuench said. “My position is the administration knew about it all along.”

Clinton left the Snyder administration in April 2015 and joined the mathematics faculty of Michigan State University in August 2015. He did not return messages seeking comment.

Miller said she doesn’t recall the tax credit being discussed at the time.

‘Lucrative handout’

At $80 million next fiscal year, the tax credit is covering a third of the cost of medical bills for passengers injured in an uninsured car. That’s because the credit is applied to Michigan’s 1.25 percent gross receipts tax on auto insurance premiums, Kuhnmuench said.

Companies eligible for the tax credit include AAA Michigan, Allstate, Farm Bureau and Farmers. Out-of-state auto insurers either pay Michigan’s tax rate or their home state’s rate, whichever is higher, and are not involved in the assigned claims plan or eligible for the credit.

Pscholka likens the auto insurance company tax credit to the $9.3 billion in credits the state owes big corporations over the next 14 years through the Michigan Economic Growth Authority.

The Snyder administration worked to cap and contain that liability last year through renegotiated deals with Detroit’s Big Three automakers.

“This is $80 million a year forever without any rate reduction to drivers,” Pscholka said. “This is the most lucrative handout ever.”

Two bills eliminating the tax credit were introduced last month. But House Speaker Kevin Cotter, R-Mount Pleasant, has urged caution against rushing to repeal the credits for fear auto insurers will turn around and hike insurance premiums.

“Likely they would (go up), I’m guessing, because that would provide a legitimate excuse for rates to go up,” Cotter said.

Supporters argue the tax credit is helping contain the cost of insurance, even though drivers have not seen any tangible rate relief.

“Whether it was inadvertent or not, that’s beside the point,” said Tricia Kinley, state director of tax and regulatory reform for the Michigan Chamber of Commerce.

“If it’s repealed, only a subset of people who are driving legally with Michigan polices are going to pay for it — and we think that’s unfair. … There’s a good policy rationale for maintaining it.”

clivengood@detroitnews.com

(517) 371-3661

Twitter: @ChadLivengood

Staff Writers Nicquel Terry and Jonathan Oosting contributed.