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State of Tax Treatment Catches Eyes in Insurance

January 27, 2011

By Linda Koco
InsuranceNewsNet

Jan. 27, 2011 -- Insurance trade groups are already weighing in on at least two topics raised by President Barack Obama in his State of the Union address this week. Those topics are taxes and health care.

Regarding taxes, Obama asked Congress to simplify the corporate system. “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit.”

That statement does not say one word about insurance. However, insurance observers have linked the statement to findings of the bipartisan National Commission on Fiscal Responsibility and Reform (Fiscal Commission) which the president created last year.

The Fiscal Commission issued a report in December, The Moment of Truth, which contained multiple proposals for cutting the U.S. budget deficit. Some of the proposals have raised concern in the insurance community, particularly the proposal to cut most “tax expenditures.” (Tax expenditure is another term for “spending via the tax code,” or for tax protections such as those insurance products).

In his speech, Obama said he doesn’t agree with all of the Commission’s proposals, either. But he did not identify the objectionable proposals.

Obama did say that: “They (the Commission members) made important progress. And their conclusion is that the only way to tackle our deficit is to cut excessive spending wherever we find it – in domestic spending, defense spending, health care spending and spending through tax breaks and loopholes.”

The reference to “spending through tax breaks” caught the eye of National Association of Insurance and Financial Advisors (NAIFA), Fairfax, Va.  In a blog posting -- State of the Union Address Signals Challenges for NAIFA Members-- NAIFA noted that the President was calling for “paying for tax reform by broadening the base through the elimination of tax expenditures that are currently a part of the Internal Revenue Code.”

Life insurance and annuity inside buildup, retirement savings in pension plans, and employer-paid benefits “are all characterized as ‘tax expenditures.’” NAIFA pointed out in its blog.

The Insured Retirement Institute (IRI), Washington, D.C., commented on the same issue. In light of the Fiscal Commission’s proposal to eliminate all tax expenditures and the potential proposals by Obama and the Congress to generate revenue, the trade group said in a statement, “IRI's highest priority is to protect the provisions in the tax code that encourage retirement savings and in particular the provisions related to the deferred taxation of insurance products.”

IRI said it “will be working to track and impact the development of a tax reform agenda in the Congress going forward.”

“The IRI applauds the President for raising awareness about the looming retirement crisis and we look forward to continuing to work with his administration and Congress to encourage access to, and use of, guaranteed lifetime income products for all Americans,” said IRI President and CEO Cathy Weatherford in the statement. 

But she also said that “we must continue to identify ways to incentivize retirement savings for all Americans. Now is not the time to consider potentially burdensome restrictions on the ability of those lacking financial security to access insured retirement solutions.”

Obama also had some words to say about the estate tax. “If we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2 percent of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break.”

As of this time, insurance groups have not commented publicly on this statement. But the subject promises to be a hot-button issue in Congress this year as it was last year.

Regarding health care, Obama recognized that some lawmakers have some “concerns” about the new health care law (the Affordable Care Act of 2010), and he indicated he is open to making improvements in the law.

He also indicated willingness to correct a “flaw” in the ACA that “has placed an unnecessary bookkeeping burden on small businesses.” Most observers believe the “flaw” refers to the ACA’s controversial 1099 provision.

But Obama was adamant about not going back to “the days when insurance companies could deny someone coverage because of a pre-existing condition.” Instead, he said, “Let’s fix what needs fixing and move forward.”

Where health care spending is concerned, Obama spoke about further reducing health-care costs (including programs like Medicare and Medicaid), and he indicated receptivity to a Republican proposal to reform medical malpractice “to rein in frivolous lawsuits.”

The National Association of Health Underwriters (NAHU), Arlington, Va., quickly issued a statement that it applauds Obama for acknowledging that current health care reforms lack broad appeal. “We are encouraged by his request for new bipartisan ideas,” said CEO Janet Trautwein.

NAHU also praised Obama’s “commitment” to reform medical liability laws in order to curb “runaway lawsuits” against physicians and his support for repealing the 1099 provision.

But, Trautwein added, the employer mandate and the medical loss ratios (MLR) provisions in the ACA “must also be repealed.”

The employer mandate requires most employers to pay new taxes if they don't offer government-approved health insurance, she said, adding “this mandate is a job-killer at a time when unemployment is still sky-high.” As for the MLR provisions, they are stringent and will invalidate many administrative expenses that undeniably improve patient care, she said.

NAIFA had a few words of its own to say about health care in its post-SOTU remarks. Ensuring affordable coverage for all Americans continues to be NAIFA’s health reform goal, the association said. “NAIFA supports bipartisan targeted revisions to improve affordability and sustainability of private insurance choices, and to ensure consumers have access to professional services provided by licensed and regulated insurance agents.”

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

© Entire contents copyright 2011 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.


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