Proposed Tax Change Concerns Captive Insurance Industry

February 24, 2008

U.S. Rep. Peter Welch, D-Vt., is asking the U.S. Treasury to block a tax code change seen by some as a threat to Vermont’s captive insurance industry.

Welch and three Democratic colleagues from states that also have captives say the changes could drive the industry out of the U.S.

“The outcome of this would be significant economic damage to our states’ economies and the potential for the captive insurance industry to gravitate to foreign jurisdictions,” they said in a letter to Treasury Secretary Henry Paulson. “Such a result would be harmful to the nation’s economy and our insurance market, and would increase the cost of insurance for corporations currently utilizing captive insurance companies.”

The letter was also signed by U.S. Reps. Neil Abercrombie and Mazie K. Hirono, both of Hawaii, and Shelley Berkley of Nevada.

A spokeswoman for Treasury, Jennifer Zuccarelli, said officials there hadn’t seen the letter yet. “We appreciate the importance of captive insurance arrangements to many taxpayers and are seriously considering all comments received as we consider how to proceed with the proposed regulations,” she said when asked for comment.

Captives are wholly-owned subsidiaries that provide property loss, casualty and liability insurance to their corporate parent.

Vermont is the third-largest home to captives, with about 580 active ones, behind Bermuda and the Cayman Islands.

“It’s provided Vermont with very good high paying jobs with no environmental downside,” Welch said. “And it’s provided the Vermont treasury with millions of dollars of revenue.”

U.S. Sens. Patrick Leahy, a Democrat, and Bernie Sanders, an independent, and Gov. Jim Douglas, a Republican, are all on record opposing the tax change.

Over the years, Vermont has regularly modified its laws to keep the state attractive to the industry and its 1,400 high-paying jobs.

Last year, the industry accounted for $22.8 million in state taxes, said Molly Lambert, president of the Vermont Captive Insurance Association.

The IRS rule change would prevent captives from deducting from their corporate taxes the value of the reserves they have set aside to pay claims, said Lambert.

Lambert said no one had figured out how much the tax change would cost companies or if it would cause any of the companies to leave Vermont. “In terms of the existing captives, I can honestly say I have not had a direct conversation with the financial planners in which they said ‘We’re out of here,”‘ Lambert said. “They want to do the right thing. They want to do it onshore. Everyone is working hard to let the IRS know that.”

But she said the change could keep companies from forming new captives. “With this uncertainty looming, there is a chilling effect,” Lambert said.

Welch said he would work to block the tax change. “The Treasury’s approach, which really came out of thin air, is a lose, lose proposition,” Welch said.

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