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Financial Planning > Tax Planning > Tax Reform

Tax reform will be top of mind for life industry this week

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Tax reform — the priority topic for the life insurance industry — will be the headline issue this week in Washington.

House Ways and Means Committee chairman David Camp, R-Mich., will release a draft tax reform proposal either Wednesday or Thursday. Camp disclosed his plans in an email to Republican members of his committee late Wednesday. While analysts believe that an election year is not the time for substantive tax reform to happen, Camp’s proposal will likely offer a clue to the thinking of those in Congress as to what areas look politically appropriate to being ripe for adding revenues to the government’s coffers, and those where these officials believe it is important to offer tax incentives to individuals and corporations.

Moreover, the Obama administration will release its proposed budget for the 2015 fiscal year early next month, industry officials say.

The Holy Grail for life insurers is sustaining current tax policy on inside buildup, the tax deferred treatment of cash value in life insurance and growth in annuities. There are currently no limits on inside buildup, but there have been proposals talked about for years that would cap inside buildup, one number heard frequently is $3 million. Whether Camp will propose any change to that is one that industry lobbyists are keeping a keen eye on.

See also: Are insurers fighting the wrong war?

Another area of note is death benefits. Several industry lobbyists said they have never been subject to a federal income tax. But, as one lobbyist said, “We always double the watch when the night is still.”

Cathy Weatherford, president and CEO of the Insured Retirement Institute, said her group is focused on maintaining strong incentives for retirement savings.

She said that the current tax incentives for retirement savings, including the tax-deferred treatment of annuity inside buildup, “are essential to helping Americans save and prepare for their retirement years.” She said they are of “particular importance for middle-income Americans, who would be less likely to save for retirement if these incentives were reduced or eliminated.”

See also: Mark your annuity calendar

Moreover, she said, 77 percent of middle-income baby boomers say tax deferral is an important consideration when selecting a retirement product. “With these facts in mind, the protection of all retirement savings incentives will remain one of IRI’s top public policy priorities,” Weatherford said.

She takes comfort in the fact that past Congressional Budget Office analyses concluded that there is no long-term budgetary benefit to cutting or eliminating these incentives, “but our research has shown that a reduction would inflict unnecessary harm to retirement savers.”

An investor’s note by Washington Policy & Analysis said today that the Camp draft “will provide ample opportunity for talking points,” but “a mid-term election year is not the season for broad reform.”

Washington Policy & Analysis, which advises institutional investors and hedge funds, said that, “Accordingly, we remain firmly of the opinion that the odds of the House even passing legislation this year are very small, and remain small through the next Congress as well.”  However, the legislation could cause some nervousness in the financial markets, as a host of issues are likely to be included in the draft, including:

Reduction in the deductibility of business interest expense;

Changes to depreciation schedules;

Elimination of last in/first out (LIFO) accounting rules;

Reduction in the deductibility of advertising expenses; and

Taxing carried interest at marginal rates, the analysts said.

In his memo to Republican members of the committee, Camp said that he thinks now is the time to look at the issue because, “We see firsthand that real families are struggling – they haven’t seen a pay raise in years, many have lost hope and stopped looking for a job and kids coming out of college are buried under a mountain of debt and have few prospects for a good-paying career.”

He added that Congress has “already lost a decade, and before we lose a generation, Washington needs to wake up to this reality and start debating real policies and offering concrete solutions to strengthen the economy and help hardworking taxpayers.”

Camp said in the email to the Republican caucus that his proposal to “overhaul our tax code” will be an effort to make it: “Simpler and fairer for families and employers, and strengthen our economy – meaning higher wages and more take home pay for the American worker.”

See also: 

The future of life insurance taxation

As to the Obama budget, tax analysts note that the leaks so far tend to emphasize issues that focus on the concerns of Obama’s Democratic base, and not on issues aimed at getting bipartisan support.

Industry officials note that reductions in the tax benefits for Corporate Owned Life Insurance and on reducing the Dividends Received Deduction in tax-advantaged products. DRD is a tax deduction received by a corporation on the dividends paid to it by companies in which it has an ownership stake.

Another industry lobbyist also said that Obama’s proposed budget last year added limitations to accumulations in tax-qualified retirement plans. The limitation in last year’s budget was $3.4 million, which amounted to about $205,000 annually, the lobbyist estimated. 

On another important issue, insurance analysts and industry lawyers are saying action by the Federal Reserve Board last week in finalizing detailed capital and liquidity requirements for banks spoke loudly for concerned insurers because the lengthy documents did not mention nonbanks.

It buttresses the emerging view that the Fed and other banking regulators will establish different rules for nonbanks on capital and liquidity standards, as well as what it will look for in administering stress tests to nonbanks designated as systemically significant, such as American International Group and Prudential Financial.

In its statement regarding the new standards, issued Feb. 18, the Fed said specifically that the final rule will not apply to nonbank financial companies that are designated by the Financial Stability Oversight Council for Federal Reserve supervision. Instead, the Federal Reserve Board said it will apply enhanced prudential standards to these institutions through a subsequently issued order or rule “following an evaluation of the business model, capital structure, and risk profile of each designated nonbank financial company,” the statement said.

Oliver Ireland, a partner at Morrison & Foerster in Washington, D.C., and a former associate general counsel at the Fed, said the statement “pretty much said they are not doing nonbanks the same way they are doing banks,” that they plan a “more-tailored regime” for overseeing nonbanks.

Incoming Fed chairman Janet Yellen made that clear in answering questions about non-banks in her first appearance as chairman before the House Financial Services Committee two weeks ago. The issue is expected to come up again when Yellen testifies on the same issues Thursday before the Senate Banking Committee.

In her testimony, she said the Fed “explicitly decided, when we put in effect our capital rules, to defer their application to savings and loan-holding companies with substantial insurance activities, and to the other nonbank SIFIs that were designated, we wanted to have a chance to study what an appropriate regime would be, recognizing that there are important differences between the insurance business and banking.

“We understand that the risk profiles of insurance companies really are materially different and we are trying our best to craft a set of capital and liquidity standards that will be tailored to an appropriate – to the risk profiles of insurance companies,” she added.

See also: Industry girds for next tax battle


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