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.