In his report in The Washington Examiner, Tim Carney shed light on an underreported issue that could derail the most significant tax reform effort in thirty years. Even if Senator McConnell musters enough votes in the Senate, important differences between the Senate and House bills will need to be reconciled. Among the most significant is the “base erosion” provision of the Senate bill, which enjoys bipartisan support but faces stiff opposition by foreign insurance lobbyists.
The passage of the base erosion provision would mark the end of a decade-long battle to close one of the most destructive loopholes in the tax code. Since the 1980s, the percentage of U.S.-based insurers in the American market has declined from 85% to 27%. The percentage of top reinsurers that are foreign-owned has quadrupled.
The reason why foreign insurance companies are dominating in American markets is not because they are offering a superior service. Rather, it is due to an IRS loophole that allows foreign-based insurers to avoid taxes. Even if they are collecting U.S. premiums, insurance companies can avoid taxes as long as they buy reinsurance from foreign affiliates that are based in low tax jurisdictions abroad, notably Bermuda. The tax savings that foreign insurers enjoy gives them an advantage in raising capital, which they use to buy out American insurers.
Carney’s report offers a clue as to why the issue has not generated much attention. Washington’s instinctive partisanship notwithstanding, a broad, bipartisan coalition supports closing the loophole. Polls show that 85% of Americans have had it with corporate tax loopholes. Even conservative groups generally opposed to any tax increase favor the provision because it would level the playing field between U.S. and foreign insurers, broaden the base of taxpayers, and offset corporate tax cuts.
Understandably, those who do oppose the bill are unleashing an army of lobbyists to kill the provision with as little fanfare as possible. As Carney reports, the Senate bill has “sparked blowback” from foreign members of the American Council of Life Insurers, who are trying to lobby Finance Committee Chairman Orrin Hatch. As a recent letter by a coalition of conservative groups notes, foreign insurance companies are resorting to “misleading talking points,” claiming that the loophole lowers insurance prices for American consumers while downplaying the tremendous loss of tax revenues, job and capital that the loophole entails for the United States when offshore insurance affiliates strip their earnings.
The ongoing saga over the base insurance provision is a reminder that opposition to tax reform comes in many forms. Advocates of big government and wealth redistribution are not the only ones apologizing for today’s convoluted, high-tax regime. So too are crony foreign industries determined to kill tax reform for the sake of clinging on to their preferred carve-outs.
Whether or not the base erosion provision survives will be an important indicator of whether Congress is serious about making the tax code more competitive, or whether it will continue to allow foreign special interests to cheat American taxpayers.