Study: Californians Would Pay $1.9B More for Insurance If Congress Passes Border Adjustment Tax

July 13, 2017

Californians would face $1.9 billion in higher insurance costs if Congress passes a border adjustment tax as part of federal tax reform, according to a study issued today by the R Street Institute and the Pacific Research Institute.

According to the authors of the study, this tax would make it “virtually impossible” for U.S. insurers to buy global reinsurance.

“As Congress prepares to consider structural changes to the U.S. tax code, proposals that target international reinsurance would have adverse consequences on the ability of Californians to affordable obtain coverage,” study authors Lars Powell, Ian Adams, and R.J. Lehmann, said in a statement.

Key points in the R Street study include:

  • Californians have affordable property insurance rates – despite the constant risk of natural disasters – because insurers can spread the risk by buying international reinsurance.
  • Tax law enables U.S. insurers to write off the costs of international reinsurance. They cede about 20 percent of direct written premiums to reinsurers annually.
  • To pass tax reform legislation this year with a majority vote, Congress must make the proposal “revenue-neutral” and are considering proposals, such as a border adjustment tax, that would generate revenue to offset expected revenue reductions from lower marginal tax rates. A border adjustment tax taxes imports, but exempts exports. Since the U.S. has a trade deficit, the border adjustment tax expands the federal tax base and therefore offsets lower expected revenues from other tax reduction proposals.
  • Many countries exempt financial services like reinsurance from their value added tax. But if Congress enacts a tax without doing so, U.S. insurers would essentially not be able to use international reinsurance any longer.
  • If insurers are not able to buy reinsurance to spread their risk, all the risk would be concentrated in the U.S. rather than spread globally. This would make California’s insurance market less competitive, and result in Californians paying higher premiums.

A border-adjustment tax is one of the ideas that has been floated in Washington as part of a major tax reform effort expected later this year. To date, specific legislative proposals have not yet been put forward by Congress or the White House.

The R Street Institute is a nonprofit public policy organization with the mission of engaging in policy research and outreach to promote free markets and limited, effective government.

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