By Steven A. Morelli
Editor's Note: InsuranceNewsNet has launched a Web site, www.INNvolved.org, where you can get the tools and information you need to take action to preserve the favorable tax treatment of life insurance products.
Of all the things to be called these days in Washington, D.C., a “tax expenditure” might be the most insulting.
That’s the name – and target – hanging around the neck of life insurance as Congress takes aim at tax reform. Tax treatment is what the insurance industry prefers to call the government’s hands-off approach to key features such as the death benefit and the inside build-up in permanent life policies. The favorable tax treatment legacy turns 100 this year.
It was a century ago that insurance agents with the National Association of Life Underwriters (NALU) descended on Washington to make the case why life insurance deserved special status as legislators established an income tax system. A direct appeal to President Woodrow Wilson won the day for the industry. NALU is now the National Association of Insurance and Financial Advisors (NAIFA) but although the association’s name has changed, the fight has not.
NAIFA is planning a congressional conference April 8-9 in Washington to promote the favorable tax treatment because once again, legislators are edging a real reform effort. And they might mean it this time, especially with everyone’s head hitting the debt ceiling every few months.
“They will deal with the ceiling and whenever they do, they ask if they should pursue policies that would allow us to continue on a more sustainable basis rather than having to face these challenges every few months,” said Diane Boyle, NAIFA’s vice president of federal government relations.
Those questions about sustainable revenue lead to louder demands for comprehensive tax reform, which goes down a familiar path.
“Whenever they get to that discussion, the conversations that we had been hearing leading up to the fiscal cliff as well as from the Simpson-Bowles Commission, or when you had the gang of six/eight/pick a number, were the same,” Boyle said. “Everyone was saying we need to simplify the code, lower rates and broaden the base.”
That sounds good to everybody until those simplifying the code and broadening the base produce a hit list of “tax expenditures,” which is a clinical way of saying tax loopholes and breaks. Although “loopholes” might conjure images of tax delinquents sneering greasy lips at a responsible, overburdened public, each one of them was a promising brainchild of a legitimate union of interests, such as insurance.
The official list of expenditures and costs is produced by the congressional Joint Committee on Taxation, which serves the House Committee on Ways and Means and the Senate Committee on Finance. In its latest expenditure report, released in February, a certain number in the financial institution section pops out like a low-hanging, plump plum. It’s $157.6 billion, the amount of tax revenue expected to be lost in the five years from 2013 to 2017 by excluding investment income in life insurance and annuity contracts, also known as inside build-up. The next largest figure is $13.2 billion for the special treatment of life insurance company reserves.
The national debt is past $16.5 trillion and the United States is adding to that with a deficit of about $1 trillion a year. For a sense of how fast the debt is growing, visit usdebtclock.org. (This is not recommended for those prone to motion sickness.)
The deficit and debt numbers are so large that the $30 billion of annual revenue from taxing the inside build-up could be lost in a rounding error. But it could be the baby in the bathwater in the case of wholesale reform, as promoted by the IRS’ Taxpayer Advocate Service and the National Commission on Fiscal Responsibility and Reform, led by Alan Simpson and Erskine Bowles.