The Roman politician, general and renowned orator, Marcus Tullius Cicero, once wrote that “custom is the best interpreter of the law.” Even today, his observations are relevant to a debate that’s about to erupt in the insurance industry.
Let me explain: as soon as next week, the House Ways and Means Committee is going to start circulating some proposals related to corporate tax reform. The proposals will try to lower corporate marginal tax rates while maintaining revenue by reining in deductions and credits. In principle, this makes sense. But one reform that may end up in the conversation—the corporate income tax exemption for fraternal insurers—goes to the heart of the reason why we have corporate tax exemptions in the first place.
Today, most corporate tax exemptions, quite properly, are weighed on grounds of their costs and benefits. And fraternal insurers — sellers of life insurance operated by not-for-profit fraternal benefit societies — pass that hurdle easily. One study estimates that they bring a total social benefit of $3.4 billion in return for their $50 million tax exemption. That’s probably the best reason to keep it around.
But there’s also a reason rooted in custom to keep the corporate tax exemption for fraternals: it’s the first, oldest and only continuous exemption we’ve had to the corporate income tax that has a verifiable cost-benefit justification. Only one other exemption has lasted as long as the one for fraternals: the exemption for religious institutions. And since the benefits of religious activity cannot be so easily quantified, it’s justified as a simple matter of separating religion from the state.
The fraternal tax exemption, on the other hand, is the root of all of the other tax exemptions for corporate entities that espouse to do social good. The practice of keeping human service charities, many hospitals, most schools and dozens of other charities exempt from the corporate income tax stems directly from the original fraternal tax exemption. If it understands history, Congress should tread very carefully before it thinks about removing the fraternal tax exemption.
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