IRS Tax Code Change Called Threat to Captive Insurance States

By | February 20, 2008

U.S. Rep. Peter Welch, D-Vt., is asking the U.S. Treasury to block a pending 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 captive insurance companies say the changes could drive the industry out of the United States.

“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,” said the 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 to Paulson was also signed by Democratic U.S. Reps. Neil Abercrombie and Mazie K. Hirono, both of Hawaii, and Shelley Berkley of Nevada.

A spokeswoman for Treasury, Jennifer Zuccarelli, said federal officials would consider the concern.

“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 in an e-mail message, responding to a request for comment.

Captive insurance companies are wholly-owned subsidiaries of large corporations that provide property loss, casualty and liability insurance to their corporate parent.

Vermont is the third-largest home to captive companies in the world, 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 Thursday. “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.

Vermont is attractive to captive insurance companies because its regulations permit them a great deal of flexibility. Over the years, lawmakers and state officials have regularly modified regulations and 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, the president of the Vermont Captive Insurance Association.

The IRS rule change would prevent captive insurance companies 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 regulations from taking effect.

“The Treasury’s approach, which really came out of thin air, is a lose, lose proposition,” Welch said. “We lose for the (Vermont) treasury, we lose jobs for Vermonters. My effort here is to avert this.”

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