WASHINGTON – Tax policy watchers are questioning whether Congress can get past philosophical differences, election-year politics and entrenched special interests as they do battle with the federal budget deficit.

The national debt started at a little over $5 trillion in fiscal year 2008 and is on track to exceed $20 trillion in just a few years, Kenneth Kies said here today during a panel discussion at the 2011 annual meeting of the Association for Advanced Life Underwriting (AALU), Reston, Va., which started Sunday and is set to end Wednesday.

The U.S. national debt could soon amount to about 80% of U.S. national gross domestic product.

“That puts us in the inauspicious company of Greece, Portugal, Spain and Ireland–all Capitolcountries that have seen a downgrade to the credit rating,” Kies said. “We’re facing the most serious fiscal problems in our history while heading towards an election. And election-year politics will make getting an agreement done this year very difficult.”

Kies, managing director of the Federal Policy Group, Washington, appeared on the general session panel along with AALU Chief Executive Officer David Stertzer; Mark Cadin, AALU’s senior vice president of government affairs; Chris Morton, an AALU vice president of legislative affairs; and Steve Ricchetti, president of Ricchetti Inc., Washington.

The panelists talked about the fiscal challenges and other challenges facing the United States.

One of the biggest questions concerns efforts to raise the current $14.3 trillion debt ceiling, which governs the amount of money the federal government can borrow.

Some budget hawks want to try to enforce fiscal discipline on Congress by leaving the ceiling where it is.

Ricchetti said failing to raise the ceiling would have catastrophic effects on the United States’ financial standing in credit markets and on the fragile economy recovery.

Cadin agreed, adding that Republicans and Democrats in Congress will have to agree on on one of two solutions: adopting a “clean debt ceiling” bill that would raise the borrowing limit without imposing significant spending cuts, or adopting a new debt ceiling along with large spending reductions.

“In my view, we need to deal with spending,” Cadin said. “The real debate will focus on how much in spending cuts both parties will agree on to get to a new debt ceiling. The reality is we don’t have to raise taxes to deal with the spending problem. We have to cut spending to deal with the spending problem. That will be the message that carries the day. And I think ultimately a spending deal will produce a deficit pact.”

Kies expressed skepticism about the idea that Republicans and Democrats can make a deal.

President Obama and leading Democrats in Congress expect $1 trillion to $2 trillion in deficit reductions to come from tax increases, and the Republicans are steadfastly opposed to any increase in income taxes, Kies said.

Kies suggested that Congress will finesse the issue by adopting a series of short-term debt ceiling extensions that could carry into the fall, or even into 2012.

Ricchetti agreed with Kies that the two parties have “taken irreconcilable political positions.”

The political rhetoric used in recent weeks will make the task extraordinarily difficult, Ricchetti said.

But Ricchetti expressed hope that the killing of Al Qaeda leader Osama bin Laden, announced by

President Obama Sunday, will provide a “unifying atmosphere” that will help Republicans and Democrats bridge differences.

The panelists agreed that the tax code provisions that apply to life insurance and related products continue to be vulnerable. Kies noted that the Congressional Budget Office identifies eliminating the tax provisions as a deficit reduction option every year.

Taxing the inside buildup in permanent policies would generate about $200 billion over 10 years, Kies said.

Cadin said that a phrase Democrats are using to describe Internal Revenue Code tax preferences–tax expenditures–could make the idea of taxing of life insurance more appealing.

“There is no question that Democrats want tax increases as part of a deficit reduction package,” Cadin said. “And ‘spending’ through the tax code doesn’t really sound like a tax increase.”

Ricchetti said the insurance industry also could be hurt if an overhaul of the tax code takes the form of lower marginal tax rates for high-income earners, as many Republicans advocate. Life sales also might suffer if, as left-of-center think tanks have proposed, the tax-favored treatment of life insurance were limited through income-testing, he said.

“Individuals with higher incomes might have a lower chance of being able to take advantage of tax preferences [offered on life insurance],” he said. “Income-testing could easily be embedded in a tax reform bill.”

Kies, however, said he is skeptical about the idea of tax reform happening this year because any effort to simply the Internal Revenue Code by removing tax preferences is “complicated.” Removing the tax preferences would affect a myriad of interests that have a vested stake in maintaining current tax credits, such as the home mortgage interest deduction, he said.

Cadin also expressed skepticism about the idea of Congress making quick changes in the tax rules.

“Tax reform is enormously complicated,” Cadin said. “We as an industry have a vested interest in the discussion. Our message to Congress needs to be: The tax code needs to incent people to save. And life insurance is a big piece of saving incentives. There’s a lot of stake.”

Cadin said the unity of the industry has never been greater.

“We have the relationships, the funding, the communication tools and the messages to address any new legislative initiative. In terms of preparation, we’re ready to go,” Cadin said.

Ricchetti predicted that the industry will be able to rebuff potential challenges to its tax preferences. He noted that AALU member companies have backed industry lobbying campaigns with about $16 million in funding.

Morton said the relationships AALU members are building to fight back adverse tax proposals are making the group stronger.

“Thirty one of 37 members on the House, Ways and Means Committee have signed a letter stating that taxing [corporate owned life insurance] is not an appropriate way to address fiscal challenges that we face as a country,” Morton said. “What we’ve done works.”

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