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Don't Hold Your Breath That Congress Will Act On Budget

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The budget submitted by President Obama has many positives and some negatives for the life insurance industry.

But, most of all, its enactment in general would provide some certainty for people involved in the life insurance business, whether they are underwriters, agents or their customers.

But, don’t hold your breath that the budget will be enacted by this Congress.

As bizarre as this may sound, a better bet would be on your favorite horse, the lottery or the roulette wheel at the nearest casino.

The reason is that the current gridlock in Congress is good business. Republicans have made it clear they will block everything proposed by this administration and Democrats in this Congress.

To put it another way, the “for sale” sign is up in Congress. Republicans, having been successful in blocking all Obama initiatives as “liberal” giveaways, a “federal takeover” of private business, or adding to the budget deficit, will do everything they can to force the administration to kick everything down the road.

Doing so, they are finding out, is the best way to increase campaign contributions by telling vested interests that they can get a better deal for themselves if Republicans win a stronger hand in the next Congress.

The result is that the only major legislation that is likely to pass Congress this year is watered-down financial services reform.

Banks are using their hefty war chests and bonus money to ensure that the reforms ultimately drafted will do little to change their way of doing business.

They would like to delay any action, but that is unrealistic.

The reason is that after spending trillions of dollars to bail out Wall Street, while Main Street suffers, calculating members of Congress are very much aware that failure to impose some measure of reform on Wall Street will backfire.

Sen. Chris Dodd, D-Conn., is jumpstarting work on a Senate reform package as a means of putting pressure on Republicans to create a bipartisan bill, but it will still be some months before legislation will be enacted. And, the devil will be in the details.

While insurers hope to escape relatively unscathed from the financial reform effort, they will be major victims of the Republican effort to stop everything else.

Tax policy is the linchpin of the life insurance business. All of its products are in some way related to tax planning, whether it is corporate or personal.

The most prominent example is the estate tax. It is now in limbo–with no end in sight–along with other administration initiatives, such as health care reform.

And, in today’s market, certainty is the most elusive commodity of them all. Worries about the future, the deficit, fears about stagnation and under a worst case scenario, a double-dip recession, are paralyzing business decisions.

While there are certain downsides to the Obama budget, they are outweighed by the benefits.

The most important component would erase the 2001 tax cuts insisted upon by the Bush administration, and pushed through, albeit reluctantly, by their supporters in Congress.

These tax cuts, as acknowledged even by economists who worked in the White House, were a disaster, not only for the insurance industry, but the economy as a whole.

Currently, the estate tax has expired. Under current law, it will return in 2011 with a $1 million exemption and a 55% tax rate.

The President’s budget assumes a retroactive reinstatement of the estate tax to January 1, 2010, at 2009 levels, which are a $3.5 million per-person exemption and a 45% tax rate.

It also includes a proposal contained in last year’s budget of a “saver’s credit,” which would provide an incentive for low-wage earners to contribute to a qualified retirement plan or IRA. The credit would be fully refundable and provide a 50% match on contributions up to $500 ($1,000 for joint filers).

The president is also proposing that small businesses that employ 10 or more people and that don’t offer a retirement plan be required to enroll their employees in an IRA to be funded by a payroll deduction, although the employees could opt out.

This would again create powerful incentives to buy the products that are the bread and butter of the insurance industry.

Moreover, there are also incentives to buy insurance products through provisions in the budget that would reinstate top rates of 36% and 39.6% for high-income taxpayers.

The 36% and 39.6% rates would apply to single individuals with incomes over $200,000 and married couples filing joint returns with incomes over $250,000.

The administration is also proposing, as it did in the 2010 budget, another incentive for small insurance agencies to grow their business.

The specific proposal would raise the exclusion currently available on gain realized on qualified small business stock from 75% to 100%. The exclusion is intended to help small businesses raise capital.

The problem with using legislative leverage to generate only campaign contributions is that the uncertainty is hurting everyone.

High deficits and unemployment will not go away until Congress accepts accountability for its past actions and decides to deal decisively on a bipartisan basis with the economic problems that are taking their toll on our national credibility, energy and wealth.