Applying a BAT to reinsurance would be a big swing and a miss by Congress
As we all saw in recent media coverage of President Donald Trump’s 100th day in office, many observers treat the first 100 days of a new presidential administration as if were the only time that matters, a legacy that has been with us since President Franklin Roosevelt passed most of his New Deal agenda in the first three months of his administration in 1933.
But in some ways, the first 100 days of any new Congress or presidential administration actually is more like baseball’s spring training. It offers lawmakers the chance to warm up, get their teams set and plot out a game plan for the coming year. For baseball, the end of spring training is marked by the start of competitive play. As of last week, Washington’s spring training is closed and it is time to play ball.
The president, congressional leaders and Washington’s many think tanks all have their versions of what comprehensive tax reform should look like, and frankly, everyone is all over the field. One of the biggest issues under debate is a plank from the House Republicans’ plan called the border-adjustment tax, or “BAT.” If Washington isn’t careful, this plan could turn into one giant swing and a miss, particularly when it comes to the reinsurance market.
For a quick trip around the bases, essentially, under the BAT, companies will no longer be able to deduct the costs of imported goods and services. Meanwhile, any company that exports or profits from foreign sales will now enjoy that income tax-free. The debates over whether or not this will be a good thing for the U.S. economy tend to focus on a very few select points. However, if the subjects of insurance and reinsurance are left on the bench, we are going to find ourselves wishing for a rainout.
Right now, it’s unknown whether House Republicans still intend to go forward with their plans for a BAT, much less whether it would apply to financial services like reinsurance – something that only one country (China) of the 160 that employ the conceptually similar value-added tax does. If Congress chooses to follow in China’s footsteps, we have a problem.
In order to take on the risks of events like Texas hailstorms, Missouri tornadoes, Florida hurricanes and California earthquakes, property insurance companies cede portions of those risks to the global reinsurance market, where they are pooled with risks like earthquakes in Japan, floods in the United Kingdom or terrorist events in France. By pooling portions these uncorrelated risks from around the globe, the reinsurance market makes it possible for Americans to buy affordable insurance for their homes, vehicles and businesses.
If Congress decides to pass a BAT system that would apply to reinsurance, the cost to American consumers would be painful. A recently released study by the Brattle Group looked at the effects of a BAT on the reinsurance market and found U.S. consumers would have to pay between $8.4 billion and $37.4 billion more each year just to get the same coverage. Several of my colleagues recently have conducted more targeted research that, over the next decade, the tax would add $3.39 billion to the cost of property insurance in Texas and $1.11 billion in Louisiana.
Applying a border-adjustment tax to reinsurance would be a pitch in the dirt for American consumers and Congress shouldn’t swing. Insurance companies will be put in the unwinnable position of having to raise their prices and offer less coverage. The end result is higher costs, with more risk concentrated on American shores. That’s a bad call for everyone.
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