Insuring a Sound Tax Reform Process

“There’s good reason to be optimistic that tax reform can be done next year. That doesn’t mean we won’t have to put in the work.”

Those words from NTU’s President, quoted in a recent article from The Hill’s Naomi Jagoda, apply to numerous aspects, large and small, of getting the first major overhaul in 30 years of our complex and uncompetitive tax system to the finish line in 2017.

Although NTU will be weighing in a lot throughout the coming days about what’s ahead with tax reform, one key principle seems obvious: making sure that as the numbers behind any plan add up, the policies contained in that plan add up too. Keeping fiscal discipline is certainly important with tax reform, but sometimes the hunt for “offsets” against reductions in rates or other simplification measures can leave the law worse off than it was before.

There are many illustrations of this problem, but we were reminded of one longstanding example recently, when the Coalition for Competitive Insurance Rates reportedly alerted President-elect Trump to a legislative scheme that would effectively slap a tax on foreign affiliate reinsurance.

As regular readers in this space well remember, President Obama and his allies in Congress have for several years advocated to disallow or defer a normal business deduction for premiums that a US insurer pays to an international affiliate. This policy, described innocuously as a “revenue raiser,” would not only skew the Tax Code against foreign investment, it would also boost prices for consumers and make it more difficult for communities to recover from disasters. That’s because foreign reinsurance helps to broaden the capacity of the marketplace to absorb the costs of a mega-disaster. When that pro-market process is short-circuited, government bailouts become likelier and taxpayers suffer.

We are not alone in this assessment. Last year NTU helped lead an open letter to Congress signed by the R Street Institute, Taxpayers Protection Alliance, Associated Industries of Florida, and the American Consumer Institute warning that:

This provision [taxing foreign affiliate reinsurance] would amount to little more than a thinly disguised tariff proposal that could impose enormous costs on consumers and limit international trade. At a time when systemic tax reform is becoming more imperative, it is especially critical for Congress to avoid embedding further distortions into the law that will have long-term drawbacks and make the task of simplification even more difficult.

Research from the Tax Foundation determined that for all the rhetoric on the part of the tax hike’s supporters, the proposal “reduces GDP by about twice the revenue it collects directly.” Most recently, our friends at Americans for Tax Reform (ATR) weighed in against the reinsurance tax because it “needlessly picks winners and losers in the reinsurance industry by distorting the tax code in an economically destructive way.” As ATR’s Alex Hendrie observed, “Under federal law, insurers are permitted to deduct from taxable income any premiums paid to a reinsurance provider. This makes perfect sense because it is a necessary business expense indistinguishable from any other.” Changing that law to disallow or defer a deduction for foreign affiliates amounts to protectionism.

Discriminatory provisions against one particular industry or sector will often surface as leaders debate changes to the Tax Code. Avoiding these pitfalls will help lead to success on the road to tax reform next year.