Tax Reform Could Cost Industry $583B Over 10 Years

By Cyril Tuohy

InsuranceNewsNet

With Election Day little more than two weeks away, it’s time to look in detail at some of the latest tax numbers proposed by lawmakers in the U.S. House of Representatives as part of a comprehensive attempt at tax reform.

The Tax Reform Act of 2014 put forth by Ways and Means Chairman Dave Camp, R- Michigan, would cost the insurance industry as much as $583.6 billion over the next 10 years by repealing tax breaks for underwriters and distributors of insurance, retirement and savings products.

Proponents of reform introduced the bill earlier this year in the wake of congressional hearings and lobbying by bipartisan tax reform groups. These proponents said that lowering tax rates while making the tax code simpler and fairer for families and small businesses will help economic growth without increasing the federal deficit.

The changes are necessary to fix a broken tax code and strengthen the economy, Camp said in a statement after the release of the draft proposal in February.

“The bottom line: Just saying ‘no’ is not a solution,” Camp said.

But “no” appears exactly what the Ways and Means Committee is up against, and why the U.S. tax code is riddled with more exemptions, exclusions and monetary favors than a household sieve has holes.

Insurance interests argue that eroding tax incentives to invest in insurance, protection and retirement products harms households as much as lower tax rates help them. They are preparing to ramp up the fight.

The National Association of Insurance and Financial Advisors (NAIFA) argues in a position posted on its website that “now is not the time to make it more difficult or more expensive for families to plan for the long term.”

Who’s going to get gored and by how much will have to wait until after the Nov. 4 elections.

In the meantime, NAIFA legislative analysts Diane R. Boyle, vice president of federal government relations, and Judi Carsrud, director of federal government relations, have released a detailed analysis of the effects of the proposed changes.

Changes to defined contribution retirement plans would place annual limits on pretax contributions, costing the industry an estimated $143.7 billion.

Inflation freezes to pension plan indexing would cost the industry $63.4 billion.

A repeal of the rule allowing for the “re-characterization” of individual retirement account (IRA) contributions to traditional and Roth IRAs would cost $400 million. The proposed repeal of simplified employee pension plans (SEPs) and Simple 401(k)s would cost another $600 million, according to the analysts.

Proposed changes to government 457(b) and nonprofit 403(b) defined contribution plan limits to conform with 401(k)'s would cost $900 million. The repeal of the small-business pension plan start-up tax credit would cost another $50 million, the analysts said.

Changes to the required minimum distribution rules from inherited IRAs and defined contribution plan balances would cost another $3.5 billion. The repeal of the Affordable Care Act small-business tax credit would cost $11.1 billion, the analysts noted.

Making consistent “in-service distribution” rules for defined benefit and defined contribution plans would come to $200 million. Prohibiting unrelated business loan interest deductions “by an amount that is prorated to unborrowed policy cash values” in company-owned life insurance policies would cost the industry $7.3 billion, according to Boyle and Carsrud.

Changing the dividends-received deduction for separate accounts that support variable life and annuities would shave another $4.5 billion, the NAIFA analysts estimated. Instituting a 10-year amortization of expenses when putting agent commissions on the books would cost the industry $11.7 billion.

Requiring a 10-year amortization of 50 percent of advertising costs would further cost the industry $169 billion, the analysts said.

Changes to the way life insurance carriers account for reserves would shave another $2.5 billion from industry coffers. Changing state-based interest rates used to calculate policy reserves to a federal rate would cost $24.5 billion, the analysts found.

A repeal of the small life insurance company deduction would cost $300 million. New reporting requirements on buyers, sellers and issuers of life policies sold for profit would cost another $200 million over the 10-year period.

A repeal of the 409A tax-deferred compensation rule would cost the industry $9.2 billion, and the consistent valuation of assets for income and estate tax purposes another $1.6 billion, the analysts said.

Requiring owners and partners of small businesses to characterize income as compensation, not dividends — subjecting that income to Medicare and payroll taxes — would take a $15.3 billion bite out of the industry.

Making code Section 179 expensing permanent would cost the industry $54.9 billion. Repeal of the business entertainment deduction would cost $14.7 billion.

Changes to the deductibility of taxes paid by the self-employed would cost $5.1 billion. Changes to the amortization of intangibles like goodwill would cost $13 billion.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].