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Orlando Sentinel: Floridians should beware of federal reinsurance-tax scheme

Monday, November 24, 2014

It’s been nine years since Florida was struck by a serious hurricane. Since then, the state has enacted some smart policies that give homeowners and businesses more competitive choices when it comes to insurance; meanwhile, costly potential liabilities have gradually been shifting away from a state-backed insurer and toward a wider, deeper pool of private investors worldwide.

Unfortunately, federal legislation threatens to undo the progress made to protect Florida taxpayers by penalizing global insurance and reinsurance capacity that is so critical to Florida’s ability to bounce back from hurricanes and other natural disasters.

Recent proposals by Reps. Richard Neal, D-Mass., and Bill Pascrell, D-N.J., and Sen. Robert Menendez, D-N.J., seek a tax increase (disguised as a deduction disallowance) for foreign-owned insurers and reinsurers. The legislation closely resembles a proposal that President Obama, for the fifth year, included in his fiscal year 2015 budget.

The legislation is being touted as a way to close a tax loophole on insurance companies, while neglecting the fact that global reinsurance helps to absorb some of the risk for domestic insurers. Put a tax penalty on this smart way of diversifying options for paying huge claims, and we know what the result will be: less-affordable property insurance and greater reliance on Florida’s state-backed Citizens Property Insurance Corp. With several weeks left in hurricane season, Florida taxpayers can’t afford to worry about rising property-insurance costs that would result from shortsighted Washington policy.

In 2005, when hurricanes Wilma, Katrina and Rita battered the Gulf Coast and caused $59 billion in losses, foreign insurance and reinsurance companies stepped up to cover more than 60 percent of the payments. This global framework — with an array of investors and strong capital — is able to handle disaster recovery more effectively than a structure relying on smaller stateside companies, and its foundation rests upon sensible tax policy.

If the reinsurance tax schemes replaced current law, insurance capacity would decrease dramatically, premiums would rise and coverage options would likely be fewer in Florida. This would again put reliance on Citizens to carry the burden of property-insurance coverage, hindering the marketplace’s ability to provide competitive rates.

Consider this: A study of an earlier version of these bills by the Brattle Group estimated that its enactment would cause the price of multiperil insurance to rise by 4.2 percent in Florida, costing families throughout the state $266 million more per year to retain their current coverage. For businesses, the toll is even worse — a walloping 12.6 percent increase in costs to commercial multiperil insurance, requiring an added $264 million for businesses to pay for coverage.

It is unreasonable that Florida residents should have to potentially shoulder the burden of this half-billion-dollar threat from the federal government. Washington’s hypocrisy here is not lost on the state Legislature, which approved a bill in support of foreign reinsurance, and a growing chorus of Florida businesses and industry organizations that have publicly voiced concerns over this tax hike to their members of Congress. A number of these lawmakers — both current and former — from across the political spectrum have also entered the conversation by publicly and adamantly opposing any proposal to tax foreign reinsurers.

Even so, proponents of the reinsurance tax continue to claim it’s essential to “closing a loophole.” The fact is, foreign-owned reinsurers don’t enjoy U.S. tax loopholes, and some can even pay a higher effective rate than America-based companies. Tinkering with current law in this manner will tilt rather than level the playing field, ironically to the benefit of a few large, politically connected firms that fear healthy competition from at home and abroad.

Everyone is thankful that Florida and the rest of the country have avoided a major hurricane so far this year. But even in times of fair skies, storm clouds loom: The Neal-Pascrell-Menendez bills will hinder the chance that Florida — the country’s most hurricane-prone state — can continue its economic recovery.

In order for the state to maintain a stable property-insurance market, we must oppose this damaging legislation.

Pete Sepp is president of the National Taxpayers Union, a nonpartisan citizen group that works for lower taxes and limited government.

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