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Wednesday
Jun142017

Op-ed: A border adjustment tax could wreck the reinsurance market

By Mary Kate Hopkins and Alan Nguyen

As appeared in the Biloxi Sun Herald

If you like your homeowner’s insurance, you might be able to keep it under a border adjustment tax. But it will cost you a lot more.

 

That’s because U.S. insurers go to the world market for reinsurance to protect themselves against catastrophic loss — in effect, importing insurance while exporting risk.

 

Reinsurers spread risk by protecting insurance companies against the possibility of huge losses from hurricanes, earthquakes and other natural disasters all over the world. That makes reinsurance a global business by design.

 

But if the border adjustment tax, or BAT, were applied to services, it could bar U.S. companies from treating the purchase of foreign reinsurance as a deductible business expense.

 

That would increase risk, limit competition and drive up costs for everybody who buys insurance.

A recent study by the Brattle Group said a border adjustment tax would cost U.S. consumers between $8.4 billion and $37.4 billion more a year just to keep the same coverage they have now.

 

And, as our new report from Freedom Partners Chamber of Commerce and Americans for Prosperity shows, the effects would reach far beyond just how much people pay to insure their homes and their cars.

 

Industries such as the Gulf Coast’s offshore oil and gas drillers depend on international firms for insurance and reinsurance. If they can’t get coverage for their rigs in the Gulf, or if that coverage becomes prohibitively expensive, the lost jobs and higher costs would ripple through Gulf state economies and beyond.

 

The reasons why are simple economics — and geography.

 

“Of the 40 insurance companies to report losses from 2010’s Deepwater Horizon disaster, 16 are based in Bermuda, 13 are European, nine are American, one is Australian and one is Japanese,” reports a study by the R Street Institute of Washington, D.C., and the Louisiana-based Pelican Institute.

 

Under a BAT, it would have cost American insurance firms more to buy reinsurance from three-quarters of those companies.

 

Even Rep. Kevin Brady, chairman of the House Ways and Means Committee and a leading supporter of the border adjustment tax, has acknowledged that the global nature of reinsurance poses a special challenge for those who back the BAT.

 

“Financial services, insurance are two of those areas that we’re looking at thoughtfully to make sure we’ve got the right incentives and the right provisions in place because they are sort of a different animal,” Brady said at a Financial Services Roundtable event Jan. 25. “They have a different approach than many businesses do. We want to make sure the tax code actually encourages stability in those industries for the long term.”

 

Brady has said he opposes creating exemptions for financial services or any other industry, but those comments indicate he might be open to the idea in some form.

 

That’s the road others have followed. Many countries exempt financial services from their value-added taxes. Some BAT supporters have suggested doing the same for any U.S. border adjustment tax.

That’s exactly the wrong approach. Anytime a conversation about tax policy turns toward figuring out who wins and who loses, it’s the wrong conversation to be having.

 

Rather than carving out exemptions for special interests, Congress should carve the BAT out of tax reform entirely and focus on passing legislation that creates a fairer, flatter and simpler system for all concerned.

 

Mary Kate Hopkins is a senior policy analyst at Americans for Prosperity. Alan Nguyen is a senior policy adviser for Freedom Partners Chamber of Commerce.