As Congress ponders how best to implement tax reform, it should bear in mind that the border-adjustment tax, a key part of House Republicans’ expected proposal, would raise the lifetime costs of typical life insurance and annuity policies by $59 billion and lead to a $24.6 billion drop in sales of these valuable financial protection products over the next two decades.
Those were the findings in a recently released study from the R Street Institute. It’s bad news not only for the life insurance industry, but for the economy broadly. U.S. life insurers invest about 75 percent of every new premium dollar in fixed-income debt markets, and often are the only buyer for some kinds of bonds, particularly long-term debt. Extrapolating from a model developed by economist Marco Arena, one finds that, for every $6.7 billion in decreased life insurance premiums, U.S. gross domestic product would fall by about $1 billion.
The border-adjustment tax is a system that taxes imports, but not exports, generally by allowing U.S. companies to deduct the cost of goods and services they buy from domestic suppliers, but not those they buy from abroad. This is particularly bad news for reinsurance, best understood as insurance for insurance companies. Reinsurance is the tool that allows insurers to diversify their liabilities, to develop new products and to grow.
By its nature, reinsurance is an international business. It is important that reinsurers be able to take on different kinds of uncorrelated risks from all over the world so that they aren’t too exposed to any one kind of peril. The United States is the world’s largest market for reinsurance, but more than half the reinsurance U.S. insurers is purchased from abroad.
Making it harder and costlier for U.S. life insurers to buy reinsurance will hurt their access to capital and, ultimately, their ability to provide affordable products. Despite not being mandatory, like auto insurance, roughly 60 percent of Americans report that they hold some sort of life insurance coverage. Life insurance and annuity products quietly support vital parts of everyday life. They help consumers to provide savings options, to plan for an untimely demise and to protect against the risk of running out of money thanks to an unexpectedly long life.
Should fewer Americans buy life insurance and annuities, there would be consequences for state and federal welfare program. These financial products help Americans to sustain the living standards that keep them off of government welfare programs like Medicaid, nutrition assistance, public housing, and family support, on which the federal government alone spent a combined $470 billion in 2014. Losing access to affordable life and annuity products would even lead to an expansion in the obligations secured by the unsustainable federal Pension Benefit Guaranty Corp.
There also would be consequences for state and federal tax revenues. In 2016, life insurers paid $10.8 billion in taxes and fees to state and local governments. In addition, life insurance and annuity contracts provided $180 billion in benefits to policyholders, beneficiaries and annuitants.
Other tax reform ideas that involve raising the cost of reinsurance — like imposing a reciprocal tax, a territorial tax or a discriminatory tax on insurance affiliates — similarly would harm U.S. life insurance consumers. If Congress does move forward with a border-adjustment tax as part of its tax-reform package, it should follow the lead of the roughly 160 countries around the globe that employ the conceptually similar value-added tax. Such countries almost universally exempt financial services from the tax and only China, with a reinsurance market a fraction the size of the U.S. market, applies such a tax to internationally sourced reinsurance.
Life insurance products allow consumers to grow old and build their lives with confidence. They save taxpayers money and support the nation’s economic well-being. Whatever else tax reform does, Congress should be careful not to trample on such a key source of financial protection.
Image by Rawpixel.com