The Effects of Tax Reform on Business Insurance

The Tax Cuts and Jobs Act made significant modifications to insurance-specific tax rules. These included lowering the corporate tax rate from 35% to 21%, changing foreign derived intangible income rules, and creating a provision that changes how reserves are discounted.

Tax policies influence economic decision-making on issues like work, savings, interstate migration, investment and business organization. Significant reforms may have unintended effects that do not jibe with economic model predictions.

Costs

Taxation has an enormous effect on people’s decisions about work, saving for retirement and choosing where they will live. Furthermore, taxes affect entrepreneurs when organizing their businesses to optimize investment and borrowing activities as well as increase global competitiveness when seeking foreign investments. Major tax reforms aim to reduce distortion, incentivize work, simplify tax codes and close loopholes so as to enhance American corporations competitiveness – although their success may depend on external influences that go beyond economic models; results don’t always follow predictions made from them.

The 2017 Tax Reform Law reduced corporate taxes, yet its effect on insurance companies remains complex. Changes to depreciation rules and limits on net interest deductions under TCJA are expected to reduce insurers’ deferred tax assets (DTA), since insurance companies recognize them for financial reporting purposes at different times than income tax expense recognition – thus leading to an remeasurement that decreases surplus.

Coverage

Lawmakers must draft a tax reform package that prioritizes economic growth while moving the tax code toward simplicity, transparency and neutrality. Broadening individual income tax bases while simultaneously improving cost recovery provisions could make the system more pro-growth without significantly impacting federal revenue collections or diminishing incentives to work and invest.

The Tax Cuts and Jobs Act temporarily reduced average tax burdens through altering the structure of individual income taxes with lower rates and brackets, larger standard deductions and child tax credits, eliminated personal and dependent exemptions, and limitations on itemized deductions. By continuing these changes, compliance costs could be decreased while simplifying filing for millions of individuals; however, doing so would decrease revenue by $7 trillion on a conventional basis and $3.4 trillion dynamic basis over 10 years.

Other reforms could shift the income tax more closely towards consumption-based taxation, eliminating double taxation for retirement savings and investments, while simplifying tax codes by eliminating deductions and credits tailored specifically to narrow interests.

Taxes

While the corporate tax rate reduction in the Tax Reform Bill provides substantial advantages for insurance firms, this gain could be offset by various revenue enhancements affecting life and property/casualty insurers – particularly repeal of net operating loss carrybacks which could decrease capital and surplus for life insurers.

Another provision of the TCJA alters how inflation is measured. It replaces the Consumer Price Index for All Urban Consumers with chain-weighted Consumer Price Index for All Urban Consumers (CPI-U), designed to account for changes in spending due to price shifts.

TCJA also expanded the maximum depreciation allowance on new investments from $2 million to $5 million and bonus depreciation by 100 percent for equipment placed into service during 2023. Unfortunately, these tax cuts are set to expire by 2025 and in order to extend them, Congress would need to increase individual taxes through higher income and estate tax rates while closing carried interest loopholes for professional investors.

Regulation

Tax legislation plays an essential role in people’s decisions on work, savings and where to locate their businesses. Although economic theory and models can assist with creating policy that meets desired outcomes, their actual effects often depend on overall economy considerations that cannot be predicted; so policy changes don’t always follow expected paths.

Eradicating double taxation of corporate income would level the playing field among different forms of business, reduce distortions in financing choices and boost competitiveness. An easier tax system would provide sufficient revenue for public goods funding through flat individual income taxes and consolidated corporate taxes with no carrybacks and limitations on net operating losses. Additionally, adopting a minimum tax of 10 percent on foreign earnings and country-by-country global intangible low-taxed income (GILTI) taxes would mitigate incentives to offshorer profits and real investments overseas and boost revenues by hundreds of billions of dollars while simultaneously simplifying and streamlining compliance costs for tax codes worldwide.