An early warning: The stars are aligning for major changes in the makeup of the U.S. government and its tax policy over the next several years. And for an industry like insurance, whose products are so tied to tax policy, a vigilant leadership and rank-and-file will be essential not only for future prosperity, but also its very survival.
Events in the last week justify this concern. Travis Childers, a conservative Democrat, defeated a Republican 54% to 46% in the campaign to represent Mississippi’s 1st congressional district.
The Washington Post called the victory a potential “bellwether” of upcoming change. It constituted the third straight special election defeat for the Republicans this year.
As Joe Lieber, a former top aide to a conservative Republican senator from Oklahoma and now a pundit at Washington Analysis, a buy-side securities firm, said even before the vote: “That Republicans have to even defend this seat shows just how weak the GOP ‘brand’ is.”
Lieber predicts that Democrats will gain “a number of seats in the teens” in the House to build on their 31-seat pickup in 2006. And, he says “they are likely to match, if not surpass, their 6-seat pickup in the Senate.”
And those changes will come at a crucial time for tax policy. In recent comments at the annual meeting of the Association for Advanced Life Underwriting, Ken Kies, an AALU tax counsel, warned that he sees the 2009-2010 congressional cycle “as the most active tax legislative exercise that the country has ever witnessed.”
Kies sees the coming Congress as potentially the “mother of all tax writing periods in our history,” calculating that $4 trillion of tax provisions will be expiring by the end of 2010. “That is more expiring tax provisions than ever before,” he said. “Any industry is well advised to view everything as on the table, because it will be.”
Martin Lobel, a partner at Lobel, Novins & Lamont in Washington, D.C., and an expert on state tax law, agrees. Lobel, who is also chairman of Tax Analysts, which publishes Tax Notes Today, sees a mandate for the next Congress to raise revenue. “Absolutely,” he says, adding that the changes could exceed those included in the Tax Reform Act of 1986.
What happens depends on how big a majority the Democrats have, as well as who is in the White House, and another factor is the state of Wall Street, Lobel said.
“What is interesting is that everything is on the table right now because there is pent-up need for reform,” Lobel said. “Everyone knows that the tax code is much too complicated and is going to be simplified.”
He sees a big shift away from tax benefits away from the top 1/10th of 1%, of the population, who were the beneficiaries of most of the tax breaks in the 2001-2003 period, but are now “going to lose a chunk of those benefits.”
Lobel says the tax benefits of annuities “will be on the table,” as will the tax benefits of offshore insurers. Whether the changes could include a tax on inside buildup is unclear. “It is going to depend on a whole bunch of things. Some of those factors are the state of the economy and how much revenue the Congress believes it will have to raise,” Lobel said.
At the end of the day, Congress will have to raise revenue, he said. “The way they did it in 1986 was to scramble the eggs so that everyone got hurt a little and everyone got helped a little,” he said. “They simplified the tax code and lowered the rates; that is what is going to have to happen in the next go around.”