Californians would face $1.9 billion in higher insurance costs if Congress passes a border adjustment tax as part of federal tax reform, according to a new study released today by the R Street Institute and the Pacific Research Institute. This tax would make it virtually impossible for U.S. insurers to buy global reinsurance, which they commonly use to spread risk and keep insurance rates affordable.
Click here to read the R-Street PRI study.
“As Congress prepares to consider structural changes to the U.S. tax code, proposals that target international reinsurance would have adverse consequences on the ability of Californians to affordable obtain coverage,” said study authors Lars Powell, Ian Adams, and R.J. Lehmann.
“Whatever road Washington takes on tax reform, it must act carefully and avoid the unintended consequences of a proposal like a border-adjustment tax,” said PRI Senior Fellow in Business and Economics, Dr. Wayne Winegarden. “Adopting tax reform that has the effect of increasing the insurance rates of all Californians, or worse, devastating our state’s insurance market, is the wrong approach.”
Among the key points in the R Street – PRI study:
· Californians have affordable property insurance rates – despite the constant risk of natural disasters – because insurers can spread the risk by buying international “reinsurance.”
· Under current tax law, U.S. insurers can write off the costs of international reinsurance just like any other cost of doing business, helping them to keep policies affordable. They cede about 20 percent of direct written premiums to reinsurers annually.
· To pass tax reform legislation this year with a majority vote, Congress must make the proposal “revenue-neutral” and are considering proposals, such as a border adjustment tax, that would generate revenue to offset expected revenue reductions from lower marginal tax rates. A border adjustment tax taxes imports, but exempts exports. Since the U.S. has a trade deficit, the BAT expands the federal tax base and therefore offsets lower expected revenues from other tax reduction proposals.
· Many countries exempt financial services like reinsurance from their value added tax (VAT). But if Congress enacts a tax without doing so, the R Street-PRI study concludes that U.S. insurers would essentially not be able to use international reinsurance any longer.
· If insurers are not able to buy reinsurance to spread their risk, all the risk would be concentrated in the U.S. rather than spread globally. This would make California’s insurance market less competitive, and result in Californians paying higher premiums.
A border-adjustment tax is one of the ideas that has been floated in Washington as part of a major tax reform effort expected later this year. To date, specific legislative proposals have not yet been put forward by Congress or the White House.
The R Street Institute (www.rstreet.org) is a nonprofit, nonpartisan public policy organization, whose mission is to engage in policy research and outreach to promote free markets and limited, effective government. Follow R Street on Facebook and Twitter.
The Pacific Research Institute (www.pacificresearch.org) champions freedom, opportunity, and personal responsibility by advancing free-market policy ideas. Follow PRI on Facebook, Twitter, and LinkedIn.
This article is republished with permission from our friends at Pacific Research Institute.
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