WASHINGTON (April 10, 2013) – A provision in the White House’s newly released Fiscal Year 2014 budget would drive up the cost of property insurance across the country, hitting disaster-prone areas particularly hard, the R Street Institute warned today.

Reviving a proposal included in several of its recent budgets, the Obama administration’s 2014 plan calls for disallowing the deduction that U.S. insurers usually earn for reinsurance – that is, insurance for insurance companies – if the company receiving the premiums is a foreign affiliate.

The proposal, which closely resembles legislation introduced in the last session by Rep. Richard Neal, D-Mass., and Sen. Robert Menendez, D-N.J., is projected by the Office of Management and Budget to raise $2.62 billion over the next five years and $6.21 billion over the next decade.

However, analysis by the Brattle Group finds that the new tax would reduce the net supply of reinsurance in the United States by 20 percent and increase the cost U.S. consumer pay for insurance by $11 billion to $13 billion annually

“This proposal represents a protectionist and economically destructive tax that would benefit a small group of domestic insurance companies at the expense of U.S. consumers,” said R Street Senior Fellow R.J. Lehmann. “Its costs far exceed the revenue it would generate, and its ultimate effect would be to drive reinsurance capital – so sorely needed in catastrophe-prone states like Florida, Louisiana, Texas and California – out of the country.”

In addition to making reinsurance more costly and limiting access to the global reinsurance industry, which allows catastrophe insurance to function by pooling a wide variety of different kinds of risks from around the world, the proposal is unnecessary, Lehmann added. Cross-border reinsurance transactions are already subject to a tariff and the Internal Revenue Service has the authority to disallow any reinsurance transactions that don’t involve a genuine transfer of risk.

If implemented, the rule also would violate also would violate U.S. commitments to the World Trade Organization.

“The plan would amount to taxing a company differently based on where its corporate headquarters is located, which violates the basic WTO principle that a member country cannot treat foreign firms differently than domestic firms,” Lehmann said. “But even before a WTO grievance would be filed, this proposal would almost certainly result in retaliatory actions by foreign jurisdictions against U.S.-based enterprises abroad, sparking a destructive trade war amid what are already very trying times for the global economy.”

Featured Publications