Insurers Would Feel Impact of GOP Tax Reform

By John Hilton

The House GOP's ambitious tax reform plan does not change the tax treatment of retirement plan contributions, but it touches virtually everyone and everything else in some way.

That includes life insurers.

The estate tax exemption would double immediately from the current $5.6 million for individuals and $11.2 million for couples and would be repealed in 2024. That means a decreased need for big-case life insurance policies.

In addition, the Wall Street Journal reports that “Life insurers would lose some tax breaks” in the plan, which is titled the "Tax Cuts & Jobs Act." No further details on this change are available.

Many associations tied to the insurance industry are taking a cautious view of the tax reform draft. In a surprising development, some business groups -- such as the National Federation of Independent Businesses and the National Association of Home Builders -- came out in opposition.

“Tax reform is a complicated equation," said Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors. "We need to ensure that any proposed changes to retirement plans, workplace benefits, life insurance and annuities do not harm the 75 million American families who depend on these products for financial protection."

NAIFA is "still reviewing" impacts on the estate tax and life insurance tax breaks, said Sheila Owens, vice president of communications and marketing.

The American Council for Life Insurers deferred comment as well

The Financial Services Institute noted the proposed 25 percent tax rate for pass-through businesses such as S corporations and partnerships. However, House tax writers vowed to prevent people from turning what would otherwise be wage income taxed at up to 39.6 percent into business income taxed at 25 percent.

"FSI has long supported tax reform that safeguards the important role of independent contractors in our economy, and provides equitable treatment of pass-through entities operated by financial advisors," said Dale Brown, president and CEO of the organization.

More Federal Debt

The proposal would add $1.5 trillion to the nation’s debt over the next decade as Republicans largely abandoned fiscal discipline in a plan that could secure a legislative achievement for President Donald J. Trump and score a political win ahead of next year’s midterm elections.

Trump promised in a statement that his administration “will work tirelessly to make good on our promise to the working people who built our nation and deliver historic tax cuts and reforms — the rocket fuel our economy needs to soar higher than ever before.”

Middle-income families would pay less, thanks to doubling of the standard deduction and an increase in the child tax credit. Wealthy Americans, like Trump, would benefit from the repeal of the alternative minimum tax and phase-out of the estate tax. Republicans calculate that a family of four with a median $60,000 income would receive a tax cut of almost $1,200.

“Today is the day. We are introducing legislation that will cut your taxes & make the entire system more simple. This will be a game-changer,” Speaker Paul Ryan, R-Wis., said on Twitter.

The proposal would leave intact the existing rules on 401(k) retirement accounts and the ability of Americans to contribute up to $18,000 into the accounts tax-deferred. But the plan would limit the widely used deduction for mortgage interest to new home loans of $500,000 or less, a sharp reduction from the current $1 million cap.

The plan also would limit the deductibility of local property taxes to $10,000 and eliminate the deduction for state income taxes, which has generated significant opposition from Republicans in high-tax states such as New York and New Jersey.

'We Need to Fix This'

The tax-writing Ways and Means Committee will work on finalizing the proposal next week, and the GOP’s ambitious timetable to get a bill to Trump by Christmas faces numerous roadblocks. The proposal caused anxiety for some House Republicans and drew criticism from a few in the Senate, which is intent on writing its own bill.

Rep. Lee Zeldin, R-N.Y., announced his opposition: “We need to fix this.”

The plan would shrink the number of tax brackets from seven to three, with respective rates of 12 percent, 25 percent, 35 percent and 39.6 percent. The tax system would be simplified, and most people would be able to file their returns on a postcard-sized form.

The plan would set a 25 percent tax rate starting at $90,000 for married couples, with a 35 percent rate beginning to bite at $260,000 — which means many upper-income families whose top rate now is 33 percent would face higher taxes. Individuals making $500,000 and couples earning $1 million would face the current Clinton-era top rate of 39.6 percent.

The plan would slash the corporate tax rate from 35 percent to 20 percent, a demand by Trump. It also would repeal the inheritance taxes on multimillion-dollar estates, a big break for the wealthy.

“There are a lot of people still in our conference who are anxious to see exactly how this plays out with growth in the economy, what the long term deficit and debt situation turns out to be,” said Rep. Steve Womack, R-Ark.

Reaction among outside groups was mixed. Tax-cut activist Grover Norquist of Americans for Tax reform said the measure was “long overdue” and offered “great news for taxpayers and those left behind by eight years of slow growth under Obama.”

The child tax credit would be increased from $1,000 to $1,600, although the $4,050 per child exemption would be repealed.

'Only a Starting Point'

Sen. Marco Rubio, R-Fla., tweeted an objection: “House #TaxReform plan is only starting point. But $600 #ChildTaxCredit increase doesn’t achieve our & @potus goal of helping working families.”

The legislation is a longstanding goal for Capitol Hill Republicans who see a once-in-a-generation opportunity to clean up an inefficient, loophole-cluttered tax code.

The plan calls for nearly doubling the standard deduction used by most average Americans to $12,000 for individuals and $24,000 for families, and increasing the per-child tax credit.

On net, it could mean tax increases for many upper middle-income families.

Republicans and Trump argue that sharply cutting tax rates for businesses would improve U.S. economic competitiveness.

The emerging plan would retain the Clinton-era 39.6 percent income tax rate for the wealthiest earners. But for that highest bracket, the tax writers raised the minimum level of income to $1 million for couples or families from the current $470,000 — a change that would reduce tax revenue.

Democrats have repeatedly complained the plan was too favorable to business and the wealthy, and contradicted Trump’s rhetoric of bringing tax relief and economic benefit to the stressed middle class.

“What we are seeing today is a plan that exacerbates the unfairness and inequality in our tax code,” said top Senate Democrat Chuck Schumer of New York. “To pay for all the tax giveaways in their bill, the Republicans are likely to make it worse for the middle class — not help them but hurt them.”

The Associated Press contributed to this report.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.