Alan Daley wrote an op-ed cautioning the development of tax reforms that needlessly tax some services, like reinsurance. Such taxes would needlessly raise consumer prices without offsetting or adjusting any international taxes. His piece can be read at the Naples Daily News.
Use Caution in Tax Reform
Tax reform could provide a much-needed boost to the nation’s economic growth and job creation, but it needs to stay clear of increasing insurance costs that will disproportionately affect Floridians.
To varying degrees, each of us is exposed to the storms, floods, perils at sea, in the air, on roads, on rails or just sleeping in our homes. These calamities sometimes result from bad human judgment or from natural forces.
To a greater degree, we address calamities through private sector insurance companies that, for a competitive premium, offer to compensate victims if damages occur. To protect themselves from the financial exposure to a major catastrophe and cover policyholder claims, insurers buy insurance from reinsurers. Reinsurers operate at a global level, spreading risk as widely as possible across many insurance risks so that no one set of claims poses a lethal hit to their solvency.
U.S. insurers, and thereby the communities they serve, rely on reinsurance to conduct their business prudently.
We welcome recent discussions on how to change the U.S. tax system so it can invigorate the economy with big ideas, such as repatriating income parked overseas, and rapid deductibility for business capital investment. Solid benefits will flow to consumers with those ideas in place, and insurance will be needed to protect that expansion and capital investment.
Unfortunately, an idea like the “Border Adjustment Tax” (BAT) is too blunt to be safe. BAT could (mistakenly) apply to the reinsurance service sold by a foreign reinsurer to a domestic insurer. If that were a BAT target, it would be a catastrophic misjudgment. Reinsurance is not taxed by foreign countries, either as an export service or as an import service, and for good reason.
A Brattle Group study found that if a BAT were to apply on reinsurance services, “the total amount of reinsurance would fall by half (by $70 billion), leading U.S. insurers to write $41 billion less in premiums per year.”
The net effect is that individual communities afflicted by calamities would bear the focused weight of more than $41 billion in damages, certainly not Congress’ intention. Among the states, the study showed that Florida would be most affected.
A recent Florida TaxWatch study showed that, if reinsurance is not exempted from the Border Adjustment Tax proposal, Florida’s property owners could see their premiums increase by up to $910 per policy, per year.
There is no merit to increasing the weight of damage bearing down on victims of floods, hurricanes and fires. The increased drag of BAT-inflated reinsurance costs would work at cross purposes with the U.S. goals of stimulating the economy. The added cost that investors would be forced to endure would shrink their willingness to make capital investments.
Applying BAT to a protective, socially redeeming service like reinsurance would be irrational. Tax reform needs to focus on stimulating the economy, not repressing it.