As Congress and the White House begin talks to reform the U.S. tax code, Texans should be particularly concerned. The taxes on imports that federal lawmakers are considering would force Texas consumers to spend $3.39 billion more on property insurance over the next decade.
That figure comes from research I and my colleagues conducted in a new joint paper from the Texas Public Policy Foundation and the R Street Institute, finding that the proposed border-adjustment tax would be a bad deal for Texas and for other states, including California and Florida, that are exposed to major natural disasters. Our primary concern is that the tax will lead to much higher costs for reinsurance, the primary tool insurance companies use to spread risk around the globe.
The reason that Republicans are eager to find a new source of income comes down to the hoops they have to jump through to make tax reform stick. Without garnering 60 votes in the Senate (a requirement of that chamber’s Byrd Rule and budget-reconciliation process) Republicans have to present a plan that’s either raises more revenue or is revenue-neutral if they want the changes to last more than 10 years. That means they must find a way to offset, or “pay for,” their tax cuts via new sources of revenue. This is how the prospect of a border-adjustment tax came to light.
A border-adjustment works like this: U.S. companies would no longer be allowed to write off the cost of goods and services imported from abroad, and also, income they earn from exports would be tax exempt. That is, tax imports, not exports. With a tax rate of 20 percent, such a system would raise more than $1 trillion in revenue over the next decade. In the process, such a tax would raise the prices of all kinds of goods and services. Insurance is one of those products that would disproportionately affect Texas, given that the Lone Star state is especially catastrophe-prone.
Floods, hail and hurricanes are all frequent visitors to Texas. To protect against that risk, Texans pay among the highest property insurance rates in the nation. Those rates are created by a combination of factors, but include the cost of guaranteeing that claims, when made, will be paid.
Primary insurers, those that spend heavily to make sure that folks walk around with advertising jingles stuck in their heads, work with another group of insurers known as “reinsurers” to protect consumers from instances in which disasters strike and many claims have to be satisfied at once. Like consumers, primary insurers pay a premium for the insurance they purchase from reinsurers.
Because reinsurers cover big risks associated with disasters, they have to bundle together various risks from around the globe. The risk of terrorism in London is combined with earthquake risk from New Zealand and hail risk in Texas, because the chances of events occurring at the same time are minimal. This international process is what enables reinsurance rates to remain low because, when it comes to risk, concentration is a bad thing.
A border-adjustment tax of the kind being proposed by House Republicans (as well as other proposals to limit insurance companies’ opportunity to pool risks internationally) would place a tax on reinsurance purchased outside of the United States. As a result, there would be incentives to concentrate those risks here on our shores, instead of spreading the risk around the world. This would lead to a less-competitive insurance marketplace and higher premiums. The result of that tax would be hugely expensive for Texans, in particular, with $339 million each year in additional costs.
The increased premiums would make it harder and costlier for property owners to buy home insurance, for employers to buy workers’ compensation insurance, for factories and industrial plants to insure their machinery and for contractors to get the terrorism insurance they need to erect new buildings.
While a border-adjustment tax would have a massive impact on the economy as a whole, its impact in Texas would be uniquely negative. Policymakers throughout the state and in Washington must come to understand that making America great again means spreading risk abroad.