The Obama administration appears to be remaining steadfast in its desire to impose haircuts on two of the life industry’s most profitable and highest-volume products, corporate-owned life insurance (COLI), and variable life and variable annuities.

The administration seems to be doing so despite the pointed opposition of certain members of Congress as well as the industry–which warns of dire consequences to the tax planning of small businesses and families.

The issue is important because both Congress and the administration are under severe pressure to close tax loopholes as a means of addressing runaway budget deficits.

On April 4, a group of 31 of the 37 members of the tax-writing House Ways and Means Committee wrote a letter to the Obama administration asking it to abandon efforts to impose any new taxation on COLI as well as limiting life insurers’ dividends-received deduction (DRD) on variable life and variable annuity products.

On April 19, the administration replied with a letter of its own, defending its taxation goals by saying the it was merely trying to end the ‘tax arbitrage” that results when interest expense allocable to tax-preferred inside buildup on life insurance contracts is allowed to be deducted.

The administration’s response letter was sent to members of the Ways and Means panel by Michael Mundaca, assistant Treasury secretary for tax policy.

It said the proposal addresses different issues than those addressed by the COLI best practices provision of the 2006 Pension Protection Act.

That provision addressed consumer protection issues as well as abuses in use of COLI by businesses that had been addressed by several courts in the late 1990s and in the early 2000s.

Gib Surles, president of the Association for Advanced Life Underwriting, said the April 4 letter from various members of the House Ways and Means Committee “was correct in urging the administration to drop budget proposals that impose harmful new taxes through provisions on COLI and the DRD of life insurance companies.”

Surles said a tax on COLI “would interfere with its vital purposes for business continuation, job protection and financing employee benefits like health, disability, survival and supplemental retirement benefits, all of which are needed now more than ever.”

He added that increased taxes through DRD would be passed on to policyholders and depress the value of their retirement security products.

Steve Brostoff, a spokesman for the American Council of Life Insurers, said the ACLI remains concerned with the proposal.

“The nation’s economy remains fragile,” Brostoff said. “Americans should be encouraged to look to the private sector to assure their financial and retirement security.”

Brostoff said the 2012 budget proposals on DRD and COLI would make personal financial security and retirement more difficult and expensive for many Americans.

“We reaffirm our belief that the DRD and COLI proposals should be withdrawn,” he said.

Robert Bloink and Prof. William H. Byrnes, who write the Advanced Advisor newsletter for Summit Business Media, said that the revival of the DRD and COLI proposals is premised on the belief that some corporate taxpayers–including insurance carriers–take unfair advantage of the tax system by engaging in tax arbitrage and by double-dipping on some deductions.

In explaining the proposals in the administration’s proposed budget for 2012 in February, Treasury Secretary Timothy Geithner justified the new taxes by saying, “We are taking the next step in creating fairness in our economy by ending loopholes that allow companies to avoid paying taxes while millions of hardworking families and small businesses pay their fair share.”

Bloink and Byrnes contend that the letter signed by Mundaca implies that the administration will not be easily swayed.

They said the administration’s “defensive posturing in the letter remains singularly focused on attacking perceived corporate abuses of the tax system,” but that the administration “continues to ignore the impact of the proposals on the small business planning client.”

They contend the administration is fighting to defend proposals that would curb many long-accepted insurance planning solutions not only for the corporate market, but the small and closely-held markets as well.

“Whether these proposals will eliminate unfairness or place an unfair burden on life insurance remains to be seen,” Bloink and Byrnes said.