Senate Passes Tax Bill That Includes Scott Life Amendments

Corker was the only Republican to vote against H.R. 1

(Photo: Michael A. Scarcella/ALM) (Photo: Michael A. Scarcella/ALM)

Members of the Senate today voted 49-51 to approve their version of H.R. 1, the Tax Cuts and Jobs Act bill, along a mostly party-line vote.

All Democrats and independents who participated voted against the bill.

Sen. Bob Corker, R-Tenn., was the only Republican to vote in favor of the bill.

The legislation the Senate actually approved appears to be a 479-page substitute amendment released late Friday by Sen. Orrin Hatch, R-Utah. A copy of the Hatch amendment is available here.

(Related: Scott Kicks Off Battle Over Senate Tax Bill Life Provisions)

Rep. Kevin Brady, R-Texas, introduced one version of H.R. 1 in the House in early November. The House has already approved that version.

Hatch, the chairman of the Senate Finance Committee, posted a Senate version about a week later. When the committee was marking up the original Hatch version of the bill, the committee also posted a packet proposed by committee members.


Medical Deduction Floor

One major difference is treatment of the medical expense deduction.

The House bill would eliminate the deduction.

The Senate bill would expand access to it, by letting taxpayers use the deduction when medical expenses exceed 7.5% of income, rather than 10%.

But the medical device tax fooor change applies only in 2017 and 2018 for all taxpayers, and for 2013 through 2016 for taxpayers ages 65 and older.


Health Insurance

One question is whether the true final version of the legislation the Senate approved today will be identical to what Hatch posted.

If the version posted today is the final version, the Hatch substitute amendment would eliminate the Affordable Care Act individual coverage mandate starting after Dec. 31, 2018.

The mandate requires many people to have what the government classifies as solid major medical coverage for much of the year or pay a penalty equal to 2.5% of modified adjusted gross income over the tax filing threshold.

Analysts at the Congressional Budget Office (CBO) have predicted that elimination of the amendment could lead to a big drop in the number of people who have health coverage.

Some Affordable Care Act supporters have equated individual mandate repeal with repeal of the Affordable Care Act individual major medical market programs.

Other health insurance market observers, including Jeffrey Smedsrud, a longtime insurance marketer, have argued that the current mandate is weak and may not have much effect on health insurance purchases.

One CBO analyst speculated that, if the individual mandate has increased the insured rate, it could continue to increase the insured rate even if it goes away, because the mandate may have produced some of the increase in the insured rate by helping to educate members of the public about the need to have health insurance.


Life and Annuities

The original Brady and Hatch versions of the bill included a number of changes related to life insurance that received little public attention.

The Brady bill, for example, would have let life insurers keep only 76.5% of their statutory reserves as tax reserves. Analysts at the congressional Joint Committee on Taxation (JCT) estimated that change would have resulted in a gain for the federal government of about $15 billion over 10 years, or costs of about $1.5 billion per year for life insurers.

Tax bill (Image: Hatch)

(Image: Hatch)

The original Brady bill also would have changed how life insurers account for "deferred acquisition cost" (DAC) expenses, or the spending associated with bringing in new life and annuity business, such as marketing, underwriting, and paying agent sales commissions.

The original Hatch bill also included a DAC tax provision.

The JCT analysts predicted the Brady DAC provision would cost life insurers about $7 billion over 10 years, and that the original Hatch version would have cost about $23 billion over 10 years.

When the Senate Finance Committee was holding the bill markup meetings, Sen. Tim Scott, R-S.C., offered a package of life insurance section amendment proposals. The committee included the Scott proposal in the amendment packet but never discussed it during the markup. 

The substitute amendment that Hatch posted today appears to include most of what Scott asked for.

Scott asked, for example, that tax bill managers extend the amortization period for DAC expenses to 15 years, from 10, and increase the DAC tax capitalization rates for new business by 20%.

Scott also asked the tax bill managers to let life insurers treat 95% of their statutory reserves as tax reserves, rather than 76.5%. The Hatch substitute amendment sets the tax reserve percentage at 92.87%.

The Hatch substitute amendment appears to keep a life settlement provision from the original Hatch bill. The life settlement provision will create new tax reporting requirements for life settlement transactions, and it will keep the life settlement providers from treating the cost of life insurance premiums as an expense when computing capital gains taxes.


The Future

The Senate and the House still have to resolve differences between their bills before a bill can go to the desk of President Donald Trump.

The House could simply approve the Senate version of H.R. 1, but congressional leaders have said they intend to set up a conference committee to try to combine the two bills.

Sen. Ron Johnson, R-Wis., said in a tweet that he decided to vote for the bill partly because he was told he could have a seat at the conference committee table.

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


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