R Street-Locke study finds BAT would hurt North Carolina insurance market

RALEIGH, N.C. (May 17, 2017) – Applying a destination-based cash flow tax—better known as a “border-adjustment tax,” or BAT—to the import of reinsurance will cost North Carolina consumers an additional $800 million in higher property-casualty insurance premiums over the next decade, according to a new report published jointly by the R Street Institute and the John Locke Foundation.

Proposals like the BAT, reciprocal taxes, territorial taxes and discriminatory taxes on insurance affiliates all would affect insurers’ ability to use reinsurance to spread risk globally, and hence disproportionately harm consumers in catastrophe-prone states like North Carolina, authors Lars Powell, Ian Adams and R.J. Lehmann find.

“With estimates from retailers that a BAT could cost the average North Carolina family an additional $1,700 per year in higher prices for everyday goods, this latest report offers even more evidence that Washington policymakers should think twice before enacting a border-adjustment tax,” said John Locke Foundation President and CEO, Kory Swanson.

The report’s projection is derived by examining the impact a BAT system would have on the supply of international reinsurance and calculating the effects that changes in price and availability would have on the state’s insurance market and policyholders. Because property and casualty insurers that do business in North Carolina—as in other states exposed to major natural disasters—cede a large volume of risks to foreign reinsurers, the state would experience dramatically higher insurance premiums under a BAT system.

“Should Congress implement a BAT system that applies to the import of insurance and reinsurance, the effects would be felt most significantly in states like North Carolina, which have significant exposure to natural catastrophes,” the authors write. “This will make it harder and costlier for property owners to buy home insurance, for employers to buy workers’ compensation, for factories and industrial plants to insure their machinery and for contractors to get the terrorism insurance they need to erect new buildings.”

R Street is a nonprofit, nonpartisan public policy research organization whose mission is to promote free markets and limited, effective government. It has headquarters in Washington, D.C. and five regional offices across the country. Its website is www.rstreet.org.

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