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ACLI In All-Out Battle To Extend Dividend Taxation Cut To Annuities

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ACLI In All-Out Battle To Extend Dividend Taxation Cut To Annuities



Life insurers are engaged in an all-out battle to extend proposed reductions in dividend taxation to annuities after the House Ways and Means Committee approved legislation denying equal treatment to variable products.

Life insurers are now looking to the Senate Finance Committee, which is considering its own version of dividend tax reduction, to extend lower rates to annuities.

The controversy erupted last week during House Ways and Means consideration of H.R. 2, legislation developed by Committee Chairman Bill Thomas, R-Calif., aimed at advancing President Bushs economic stimulus package.

Rather than eliminating the tax on dividends, as the administration originally proposed, the H.R. 2 would would do two things.

First, it would change the tax treatment of dividends from ordinary income to capital gains. Second, it would lower the capital gains tax rate from the current 10% for lower income Americans and 20% for all other Americans, to 5% and 15%, repectively.

The problem for life insurers is while the change would apply to stocks and mutual funds, it would not apply to dividends accredited to an annuity.

Jack Dolan, a spokesman for the American Council of Life Insurers, Washington, says the issue is parity.

He notes that annuities are tax-deferred vehicles but argues that the incentive to purchase annuities would be undermined by the failure to provide equal treatment.

That point was also made by several Ways and Means members in a letter to Thomas before the consideration of H.R. 2.

“Lowering rates for stock dividends would devastate annuity sales unless the benefits of these lower rates were also made available to annuity policyholders,” the letter says.

It calls on Thomas to find ways to preserve annuities as an important tool for managing retirement income.

Eight Republican committee members, including Reps. Jim Ramstad, R-Minn., Nancy Johnson, R-Conn., and Jennifer Dunn, R-Wash., signed the letter.

Despite this pressure, the committee passed a bill that does not contain the parity provision by a 24-15 vote.

Moreover, because of a very restrictive parliamentary rule, it will be impossible to try and amend H.R. 2 on the floor of the House.

The Senate Finance Committee, meanwhile, is considering a separate proposal to eliminate the taxation of dividends. That proposal, which at this writing did not have a bill number, also does not apply to annuities as introduced.

However, life insurers expect Sen. Rick Santorum, R-Pa., to sponsor an amendment to be offered during the committees consideration of the bill to establish parity for annuities.

Assuming the House and Senate ultimately pass different versions of the stimulus package, it will be up to a House-Senate conference committee to work out a consensus bill that the life insurance industry hopes will include parity for annuities.

Dolan says ACLI is working hard to make that happen. It is running ads in Capitol Hill publications focusing on the potential impact of failing to provide parity on retirees.

ACLI is also engaged in a grass-roots effort that includes personal visits to members of Congress, he says.

On a more positive note, ACLI is strongly supporting S. 992, which is the latest attempt to repeal Sectons 809 and 815 of the tax code.

Section 809 imposes a tax on mutual life insurers that is calculated by reference to the earnings of stock companies. Section 815 imposes a tax on policyholder surplus accounts established by stock companies between 1959 and 1984.

ACLI President Frank Keating says both provisions reflect a different time in the history of the industry, when life insurers only competed against each other.

“Clearly, Sections 809 and 815 have outlived their usefulness,” Keating says. “Individual life insurance companies compete against a wide array of financial services businesses, which should be reflected in the tax code.”

The bipartisan legislation is co-sponsored by Sens. Don Nickles, R-Okla., and Kent Conrad, D-N.D.

In its fiscal year 2004 budget, the administration proposed repeal of Section 809, but not 815.

Finally, the House Financial Services Committee last week began hearings on reauthorization of the Fair Credit Reporting Act, legislation which, among other things, establishes uniform rules for information sharing among finanical institutions.

Allen Caskie, chief counsel with ACLI, notes that under the current law, states are not allowed to limit the ability of financial institutions to share information among affiliates in accordance with the FCRAs provisions.

However, he says, this preemption will expire on Jan. 1, 2004, and needs to reauthorized.

Caskie says that under FCRA, certain “experience and transaction” data can be shared with affiliates without limitation. Personal data, such as health and income information, can only be shared if the individual is notified and given an opportunity to opt out.

Caskie says some states, including California, are considering laws that would bar sharing of experience and transaction information unless individuals were given notice and an opt-out opportunity.

The legislation, he says, is being considered in anticipation that FCRA will expire.

The issue, Caskie says, is uniformity. ACLI, working with the Financial Service Coordinating Council, supports preservation of the existing FCRA preemptions.

Besides ACLI, FSCC members include the American Bankers Association, the Securities Industry Association and the American Insurance Association.

Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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