Tax reform — the priority topic for the life insurance industry — will be the headline issue this week in Washington.
House Ways and Means Committee chairman David Camp, R-Mich., will release a draft tax reform proposal either Wednesday or Thursday. Camp disclosed his plans in an email to Republican members of his committee late Wednesday. While analysts believe that an election year is not the time for substantive tax reform to happen, Camp's proposal will likely offer a clue to the thinking of those in Congress as to what areas look politically appropriate to being ripe for adding revenues to the government's coffers, and those where these officials believe it is important to offer tax incentives to individuals and corporations.
Moreover, the Obama administration will release its proposed budget for the 2015 fiscal year early next month, industry officials say.
The Holy Grail for life insurers is sustaining current tax policy on inside buildup, the tax deferred treatment of cash value in life insurance and growth in annuities. There are currently no limits on inside buildup, but there have been proposals talked about for years that would cap inside buildup, one number heard frequently is $3 million. Whether Camp will propose any change to that is one that industry lobbyists are keeping a keen eye on.
See also: Are insurers fighting the wrong war?
Another area of note is death benefits. Several industry lobbyists said they have never been subject to a federal income tax. But, as one lobbyist said, "We always double the watch when the night is still."
Cathy Weatherford, president and CEO of the Insured Retirement Institute, said her group is focused on maintaining strong incentives for retirement savings.
She said that the current tax incentives for retirement savings, including the tax-deferred treatment of annuity inside buildup, "are essential to helping Americans save and prepare for their retirement years." She said they are of "particular importance for middle-income Americans, who would be less likely to save for retirement if these incentives were reduced or eliminated."
See also: Mark your annuity calendar
Moreover, she said, 77 percent of middle-income baby boomers say tax deferral is an important consideration when selecting a retirement product. "With these facts in mind, the protection of all retirement savings incentives will remain one of IRI's top public policy priorities," Weatherford said.
She takes comfort in the fact that past Congressional Budget Office analyses concluded that there is no long-term budgetary benefit to cutting or eliminating these incentives, "but our research has shown that a reduction would inflict unnecessary harm to retirement savers."
An investor's note by Washington Policy & Analysis said today that the Camp draft "will provide ample opportunity for talking points," but "a mid-term election year is not the season for broad reform."
Washington Policy & Analysis, which advises institutional investors and hedge funds, said that, "Accordingly, we remain firmly of the opinion that the odds of the House even passing legislation this year are very small, and remain small through the next Congress as well." However, the legislation could cause some nervousness in the financial markets, as a host of issues are likely to be included in the draft, including:
Reduction in the deductibility of business interest expense;
Changes to depreciation schedules;
Elimination of last in/first out (LIFO) accounting rules;
Reduction in the deductibility of advertising expenses; and
Taxing carried interest at marginal rates, the analysts said.
