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Do Dems have the upper hand in fiscal cliff negotiations?

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In the wake of President Obama’s election victory, the Administration and Democrats in Congress are likely to get much of what they seek in high-stakes negotiations underway for resolving on the fiscal cliff, according to life insurance representative speaking at a panel discussion on Friday.

Marc Cadin executive vice president of government affairs at the Association for Advanced Life Underwriting, Washington, D.C., presented his analysis of the range of fiscal issues facing Washington during an opening general session on Friday of the 23rd annual Executive Conference. Produced by Summit Business Media and The National Underwriter Company in collaboration with conference sponsor Ernst & Young, the conference session also featured speakers Steven Bensinger and Robert Hartwig, who explored trends affecting the life and P&C industries.

Because the president’s reelection has strengthened Democrats’ hand in the fiscal cliff negotiations, said Cadin, income tax rates on wealthy Americans are almost certain to rise.

“The president’s position is that tax rates for the top two percent [of the most affluent Americans] must rise,” said Cadin. “So a tax rate hike is going to happen–no question.

“Democrats realize that the longer they wait, the greater will be pressure on Republicans to cave to their demands,” he added. “the Dems now hold most of the cards.”

A key reason for Democrats’ increased leverage, he added, is that income tax rates are due to go up across the board if Congress does nothing. Absent an agreement, the Bush-era tax cuts will come January 1, expire and return to the pre-2001 marginal income tax rates. For individuals, these will range from 15 percent to 39.6 percent, the latter for those earning in excess of $382,650.

The current estate tax unified credit exclusion and top tax rate, currently $5.1 million and 35 percent, respectively, are also due to revert the pre-2001 estate tax regime: $1 million and 55 percent, respectively.

Based on figures from the CBO and Joint Committee on Taxation, federal taxes would increase by a total of $423 billion in 2013 if the Bush tax cuts are allowed to expire. The non-partisan Tax Policy Center estimates the average tax increase for 83 percent of households at $3,701.

Given the Democrat’s strong hand, said Cadin, fiscal negotiations will center around three questions: (1) What the new marginal income tax rates will be; (2) How much in additional revenue from the higher rates will be applied to deficit reduction; and (3) how entitlements like Medicare and Social Security will be impacted in the coming debate on tax reform.

“Republicans in Congress believe that entitlement reform in Congress is necessary to save the country,” said Cadin. “If we don’t reform, the country will no longer exist as it does.”

Cadin added that he envisions three outcomes for resolving the fiscal cliff debate:

  • The GOP caves to Democrats demands and increases the income tax rate for Americans earning over $250,000. Congress thereafter considers entitlement and tax reforms and deficit reduction.
  • House Republicans drag out the fiscal cliff debate to February or March, when the nation’s $16.4 trillion borrowing limit–the debt ceiling–is due to be reached. In this scenario, said Cadin, the GOP would have renewed leverage, for they could reject the President’s request for an increase to the ceiling absent legislation on taxes that is more to their liking. Upshot: The Republicans are able to force a substantive discussion on the tax debate regarding revising eligibility requirements for Medicare and Social Security.
  • The administration and Congress agree this year to a framework for resolving the range of fiscal issues, resulting in a compromise on revenue, spending cuts, and tax deductions–and a productive Congressional session starting in 2013.

Cadin noted, however, that he considers the last scenario the least likely, for it requires a level of trust between the parties that they have thus far failed to exhibit. The most likely outcome is, rather, scenario two. But Cadin doesn’t view a government default as a possibility.

“Congress will raise the debt ceiling next year–no question,” said Cadin. “The question as to the continuing funding of the government is not as important as agreement on entitlements and income tax rates.”

“There will be a deal,” he added. “The only issue is how much turmoil [in the financial markets] the GOP and the Dems are willing to bear before coming to an agreement.”

Assuming, however, that scenario three comes to pass, Cadin added, then the life insurance industry can expect a robust debate on tax reform, increasing the threat to the tax-favored treatment of life insurance as Congress looks for ways to boost revenue by eliminating deductions and loopholes in the federal tax code.

“There would be a thorough examination of the tax code,” said Cadin. “So we as an industry have to tell our story, explaining why the current tax treatment remains necessary.

“Life insurance now accounts for about 20 percent of all long-term savings in the U.S.,” he added. “It’s essential that we communicate this and other key facts about the life industry during the debate over reform.”

Also of concern to the industry, Cadin said, are increasing threats to commission-based sales for brokers and agents. He noted that changes to the regulatory regimes in the U.K. and Australia–among them the prohibition on sales commissions in the U.K. come 2013–have increased compliance costs for producers and limited the choices of products and services available to consumers in these countries.

“There is no doubt that regulatory changes in U.K and Australia have negatively impacted advisors and consumers there,” said Cadin. “Life insurance professionals in the U.S. are now facing a similar dynamic, shaped in part by the prospect of a harmonized fiduciary standard and increased commission disclosure requirements.

“These are real threats that could significantly impact our business,” he added. “Thus, we need to be diligent in educating members of Congress about how the life insurance industry works, as well as the critical role that insurance and financial service professionals play in the economy.”


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