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Reading The D.C. Tea Leaves

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WASHINGTON — Permanent estate tax reform might or might not make it through Congress this year, but the insurance industry certainly needs to remind lawmakers of the importance of life insurance.

Those were some of the points made here during a panel discussion at the annual convention of the Association for Advanced Life Underwriting, Falls Church, Va.

Panelists talked about congressional legislative priorities and the impact of the President Obama’s electoral victory

Estate Taxes

Rep. Chris Van Hollen, D-Md., praised a Senate bill sponsored by Senate Finance Committee Chairman Max Baucus, D-Mont., that would permanently set the estate tax exemption at $3.5 million, indexed for inflation; and that would set the top tax rate at 45%. The bill also would reunify the gift and estate taxes and provide portability.

“This legislation is in the budget,” Van Hollen said. “I’m fairly confident that we’ll be able to make the needed changes, so that we at least can provide some certainty and stability to the estate tax going forward.”

Other panel members questioned whether permanent estate tax reform will happen this year.

Kenneth Kies, a managing director at the Federal Policy Group, Washington, said Sen. Charles Grassley, R-Iowa, might have enough votes to filibuster an estate tax bill.

That would put off reform until 2010, when the current estate tax levels are due to sunset for 1 year before reverting in 2011 to the pre-2001 levels.

Steve Ricchetti, an AALU outside counsel, agreed that a permanent solution likely will not happen until 2010. The short-term prospect, he said, is that Congress will enact a 1-year patch freezing the exemption level at $3.5 million and the top tax rate at 45%.

Non-Qualified Deferred Comp

Kies said the AALU has made “much progress” in helping to advance S. 651, a bill sponsored by Baucus that would limit annual deferrals to $1 million.

The bill would not count earnings on deferrals toward the $1 million limit as long as earnings were based on a market rate of return.

“We have to stick with our message, which is that non-qualified deferred compensation is a legitimate and effective tool for encouraging people to save beyond what qualified plans allow,” Kies said. “It’s a perfectly appropriate way to compensate executives. When we go to Capitol Hill, we also need to talk generally about how important life insurance is to national savings, particularly for the 75 million Americans who now have protection. And we need to keep the message positive.”

The Economy

Congress is unlikely to pass a bill restricting stranger-originated life insurance or setting up a federal alternative to the current state insurance regulatory system this year because Congress and the Obama administration are placing a higher priority on a number of other issues, Kies said.

Issues of higher priority to Congress and the administration include the federal budget, health care, education, energy, and approving a new Supreme Court nominee, Kies said.

Overshadowing all of these issues is the recession, panelists said.

Responses to the economy could include new moves to infuse capital into and increase regulation of financial services companies, the panelists said.

Meanwhile, they said, Congress and the administration have to balance the need to shore up the economy with the need to keep budget deficits from putting the nation’s fiscal health at risk.

“Our main mission is two-fold,” said Van Hollen. “We have to get the economy out of the economic ditch that we find ourselves in. And we have to put the economy on a strong, long-term foundation. That means exercising financial and fiscal discipline in the years ahead as we try to reduce budget deficits and the national debt We can’t continue to pile liabilities onto future generations.”

Van Hollen said the House will likely pass statutory pay-go legislation that will advance these goals. The bill would require that future expenditures be offset by either cuts in existing programs or by raising revenue through increased taxes.

Key to putting the nation on a sound financial footing is health care legislation, which Van Hollen said will be a top congressional priority this year.

The United States can no longer afford to spend 18% of gross domestic product on health care at a time when 45 million Americans do not have health insurance coverage, Van Hollen said.

The unfunded liabilities of Medicare and Medicaid are now 5 times the size of the unfunded Social Security liabilities, he said.

The National Mood

But the percentage of Americans who say the United States is heading in the right direction has increased to 50%, up from 7% in November 2008, and much credit for the upswing in the national mood goes to Obama, Van Hollen said.

Obama helped to establish a more positive tone, in part through the flurry of legislative proposals advanced since in January, Van Hollen said.

Political commentator and economist David Gergen agreed, observing that Obama came to office with the largest electoral mandate of any Democratic president since Lyndon Johnson’s landside win in 1964.

Obama’s victory coalition, he said, embraced not only the Democratic base, but also many voters the Democrats previously had not counted on in such large numbers, such as African Americans, women, young people and Hispanic Americans.

Latinos, Gergen said, “flipped” four states that had previously voted Republican – Colorado, Nevada, Florida, and New Mexico.

“That’s a major change in the electoral strength of the party,” he said. “Obama has the makings of a new, long-term coalition. One should not underestimate this.

“The object in politics is to create an enduring majority on your side. If you can win the White House, the Senate, the House and the courts, as well as get an alignment of voters behind you that is durable, then you can change country over long period of time–dramatically.”

Gergen cautioned, however, that Obama risks undermining his electoral mandate by pursuing legislative initiatives that could worsen the nation’s fiscal position and, ultimately, alienate key constituencies, including the business community.

Gergen questioned, for example, the administration’s decision to outsource much of the legislative process to Congress, which he said needs a disciplinary hand to keep bills focused and fiscally sound.

Gergen also suggested the administration could use more “CEO-types” to bring a business-friendly perspective to the deliberations.

“There is the danger that administration’s initiatives, including the new proposal to crack down on offshore tax havens, will actually reduce jobs here in the U.S.,” he said. “A CEO would help to bring these conversations to the table.”

As to boosting regulation of the banking sector, he said the administration should not change the rules of the game enough to suppress companies’ entrepreneurial spirit.

“We won’t compete against China and India if we’re a heavily regulated society,” Gergen said. “The best thing we have going for us is our brain power and our capacity to innovate. We have to keep that spirit alive. Washington needs to hear this message from the outside.”


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