Scott Kicks Off Battle Over Senate Tax Bill Life Provisions

Warner complains about a lack of bill review time

Sen. Tim Scott, R-S.C. (Photo:  Scott) Sen. Tim Scott, R-S.C. (Photo: Scott)

Sen. Tim Scott has come out with the most detailed proposal so far for changing the life insurance tax provisions in the Senate Finance Committee's new tax bill.

Scott, a South Carolina Republican who has worked as an insurance agent, has put a three-part draft amendment in the committee's initial tax bill amendment packet.

Scott's draft amendment includes provisions concerning the taxation of life insurers' reserves, taxation of life insurers' dividend earnings, and accounting for the cost of acquiring life and annuity business.

(Related: Two Big New House Tax Bill Changes Could Affect You)

Sen. Bill Cassidy, R-La., will also be proposing an amendment to the tax bill insurance provisions, but, in the draft included in the starting amendment packet, he simply says his amendment would "make certain modifications to insurance provisions" in the bill, not what the modifications would be.

The American Council of Life Insurers declined to comment on the proposed amendments.


The Senate Finance Committee Markup

Members of the Senate Finance Committee began marking up the tax bill, Senate Republicans' version of the Tax Cuts and Jobs Act bill, today.

A copy of the committee's master amendment packet for the tax bill is available here.

The committee has posted links to a variety of bill markup meeting resources, including a link to a video recording of the meeting, here.

Today's meeting has ended. The committee is preparing to get back to work on the bill at 9 a.m. EST Tuesday, and it plans to stream video of that hearing live from its website.

Sen. Mark Warner, D-Va., observed during the hearing that understanding just what's in the Senate Finance tax bill has been difficult even for Democrats serving on the committee. He said he is not optimistic about what he'll find when he learns more about the bill.

"This is not a bill where sunshine is going to help," Warner said.

Sen. Bill Nelson, D-Fla., said he has been unable to get answers to basic questions, such as how the bill might handle

"This bill was introduced Friday, and here it is Monday," Nelson said. "This isn't the way we ought to be operating."

Sen. Orrin Hatch, R-Utah, the committee chairman, said that he wants to give Democrats a chance to have their views heard, but that they need to collaborate more with Republicans.

"I'd prefer us working together," Hatch said. "Thus far, I don't believe we've worked together, to be honest with you, and I'm not sure we ever will, on this committee."


Scott Amendment Details

The current version of the Senate Finance tax bill includes a provision that could change how a life insurer calculates its taxes when it changes accounting methods.

Senate Finance Committee (Photo: Senate)

Senate Finance Committee (Photo: Senate)

The current version also includes a provision that would change how a life insurer handles "deferred acquisition cost" (DAC) expenses, or the cost of acquiring life insurance customers, annuity customers, and purchasers of noncancelable accident and health contracts.

The starting version of the bill would:

  • Extend the amortization period for DAC expenses from 120 months to 600 months, or from 10 years to 50 years.

  • Increase the statutory DAC percentage to 3.17%, from 1.75%, for annuity contracts; to 3.72%, from 2.05%, for group life contracts; and to 13.97%, from 7.7%, for all other specified insurance contracts.

Budget analysts estimate that provision could generate a gain of $23 billion over 10 years, or about $2.3 billion per year.

Scott's version of the DAC provision would:

  • Extend the amortization period to just 15 years.

  • Keep the current three DAC product categories.

  • Increase the capitalization rates just 20%, and just for new premiums.

Scott also would a new provision that could affect life insurance company "proration," or adjustments for dividends earned on investments. Congress imposed proration on life insurers because some lawmakers argued that life insurers were getting double tax benefits when they used dividend earnings to fund policyholder benefits.

Life insurers now use a complicated formula to calculate the proration rate for each account.

The Scott amendment would set the proration rate at 70% for both life insurance policies and annuity contracts.

Scott also would add a reserve taxation provision, similar to a provision in an early version of the House tax bill, that would the current rules for calculating life insurance company reserves for tax purposes. Life insurers would, instead, "apply a 5% haircut" to the statutory reserves for contracts subject to a cash value or deposit floor, according to the amendment draft text.

A life insurance haircut proposed in an early version of the House tax bill, which has since been amended, could have imposed a 23.5% haircut on life insurance company reserves.

Congressional budget analysts have not yet estimated how Scott's proposal might affect federal tax revenue.


The House Tax Bill

The House Ways and Means Committee approved another version of the Tax Cuts and Jobs Act bill, H.R. 1, last week.

The House Rules Committee, the committee that sets the rules for how legislation comes to the House floor, is preparing to start packaging H.R. 1 for House floor action at noon Wednesday. 

— Read 5 Republican Tax Bill Sections for Agents to Track on ThinkAdvisor.


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