Coalition for Competitive Insurance Rates

Study: Reinsurance Tax Proposal Pushes Anti-Growth Agenda

Tax Foundation finds that tax would reduce GDP by twice the amount of revenue it would collect

Washington, DC (February 18, 2015) — The Coalition for Competitive Insurance Rates (CCIR), the leading voice for continued and increased competition within the insurance industry, today endorsed the findings of a newly-released economic study by the Tax Foundation forecasting considerable and unintended macroeconomic consequences associated with recent proposals to eliminate the deductibility of foreign reinsurance premiums.

According to the report by Alan Cole, an Economist at the Tax Foundation’s Center for Federal Tax Policy, a measure in President Obama’s FY 2016 budget and similar legislation proposed by Reps. Richard Neal (D-MA)and Bill Pascrell (D-NJ) and Sen. Robert Menendez (D-NJ) to tax foreign reinsurers would cost the economy more than four dollars for every dollar raised. The study also projects that the over the long term, the United States’ GDP would experience $1.35 billion in losses, which is approximately twice the revenue it would collect.

“The proposal is well-thought-out and serious, but ultimately mistaken on the policy merits,” the report states. “While the deduction eliminated is neatly matched with the income exclusion, there are substantial drawbacks to the proposal.” The study also finds that such proposals are, “part of a worrying trend of piecemeal, industry-by-industry changes to an ailing corporate tax code.”

“The Tax Foundation study demonstrates that industry-specific changes to our current, poorly constructed tax code is the wrong approach to needed tax reform,” said Tom Feeney, president and CEO of the Associated Industries of Florida. “In addition to being bad for individuals and businesses that purchase insurance, it would simply be bad public policy for America.”

Gulf Coast states including Florida that rely on a robust reinsurance market would be disproportionately subjected to the adverse effects of the proposals. For example, with Hurricanes Katrina, Wilma and Rita in 2005, more than 60 percent of the $59 billion in payments came from foreign insurers and reinsurers

According to the Tax Foundation, the toll this tax would take on GDP is the result of sharply reduced business and investment capital that would instead be diverted to tax revenue, proving negligible by comparison. Furthermore, removing the deduction would prove harmful to domestic insurers’ ability to remain stable and solvent since they rely on reinsurers’ international risk-sharing business model and capacity to distribute claims to members of the insurance population that suffer losses, thereby keeping costs controlled for consumers.

The report cites the president’s budget and a previous version of legislation introduced by Rep. Neal and Sen. Menendez as a symbolic attack on the internationality of reinsurers that will further convolute the United States’ corporate tax code. Meanwhile, the proposals neglect the need for broader reform for a country whose statutory corporate tax code is the third highest in the world.

“Congress should not go through the tax code industry-by-industry, legislatively redesigning the definition of corporate income on an ad-hoc basis in an attempt to find more corporate revenue from overseas firms,” the study concluded. “Instead, it should look to larger reforms that make the US more attractive as a domicile for corporations.”

This year marks the sixth time in which the president has included budget language specifically targeting reinsurers. Each proposal has been roundly rejected by Congress on a bipartisan basis.

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The Coalition for Competitive Insurance Rates (CCIR) is made up of business organizations, consumer advocacy groups, insurers and their associations. For more information on CCIR, please visit www.keepinsurancecompetitive.com.

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