For the sixth time, President Barack Obama is taking aim at reinsurers, including in his fiscal-year 2016 budget language that would end some of the tax benefits they enjoy. Market insiders, however, believe the administration’s latest attempt to tax foreign reinsurers will once again receive little support from members of Congress.
In his budget presented on Monday, Feb. 2, the president proposed to make reinsurers pay a 14% one-off tax on cash held offshore and a 19% tax on future earnings. If passed, the proposal would make the cost of reinsurance, especially catastrophic coverage, more expensive.
According to insurance ratings company A.M. Best Co., the proposal is fielding strong opposition from member of Congress representing states that have considerable exposure to natural catastrophes. “Their concern is that a tax increase could lead to increased costs for (re)insurance coverage, or possibly a decrease in allocated (re)insurance capacity for less profitable risks,” the firm stated, in part. “Accordingly, any resolution of this issue could be years away.”
According to an economic study by the Tax Foundation’s Center of Federal Tax Policy, the president’s measure and similar legislation proposed by Reps. Richard Neal (D-Mass.) and Bill Pascrell (D-N.J.) and Sen. Robert Menendez (D-N.J) would cost the economy more than four dollars for every dollar raised. The study also projected that 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, in part. “While the deduction eliminated is neatly matched with income exclusion, there are substantial drawbacks to the proposal.”
In recent years, Democrats and Republicans have fought over ways to tax the huge stockpiles of cash held abroad by U.S. companies. Democrats want these companies to pay the current U.S. corporate tax rate of 35% on overseas profits, which Republicans have fought. However, Senator Rand Paul has signaled his support for a 6.5% tax.
“If anything were passed, it would probably be the 6.5% tax, which would still make the non-controlled foreign corps. a favorable alternative, especially for producers way above the small casualty insurance company threshold premium of $1.2 million per year,” noted Jim Smith, chairman of SouthwestRe. “I think the consensus is that with a Republican Congress and Democratic President, not much of anything is going to happen, and this proposed tax increase has even less chance than other bills.”
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