Tax Reform Redux

Lawmakers prepare again for tax reform.

Once again, lawmakers are gearing up for another attempt at comprehensively reforming our tax code. While it is unlikely this partisan and largely gridlocked 114th Congress will actually enact a tax reform bill this year, another round of hearings, proposals and discussions is under way.

Most of the focus right now is on business taxes—corporate and pass-through (Subchapter S, LLC, partnership, sole proprietorship)—but there is a new emphasis on the tax rules governing employer-provided health insurance. Key tax writers are floating reform ideas, and some have even released “discussion drafts” of ways to reform large chunks of the tax code. The list of issues that impact NAIFA members and their clients is long and varied. Among the most important are:

• Tax rates—Virtually every lawmaker believes current rates (especially for businesses) are too high.

• Business income—whether a business organizes as a C-corporation, and thus is subject to corporate income tax, or as a pass-through entity (such as S-corporations, LLCs, and partnerships) and thus its owners pay tax through individual tax code rules— is a key issue. Tax writers are seriously examining whether to scrap the corporate rules and replace them with a “business tax” that collects revenue from business activity regardless of the business’ form of organization.

• Employer-provided benefits—Many tax writers are considering whether tax incentives for benefits are appropriately placed at the employer level. Possible new tax rules to encourage “portable” benefits packages—to include health insurance and perhaps retirement savings as well—are under discussion. This means there is the potential for doing away with the familiar exclusion from tax liability for employees whose employers pay for their health insurance or contribute to their retirement savings accounts.

• Life insurance cash values—There is always the potential that tax policy experts will again suggest that life insurance and annuity cash values be taxed in the year any gains are credited to the policy. And with a new Congress arriving in January 2017, there will be new lawmakers to educate on why this is such a bad idea.

But current tax writers seem to have gotten the message. So now, instead of proposing a direct tax on life insurance and annuity cash values, some are looking at “proxy” proposals—taxes at the corporate level that mirror a cash value tax, but impose it on carriers rather than on policyholders. These proposals so far have zeroed in on life insurance company reserves, but could shift to a look at policyholder dividends.

The current investigation into general tax rules and systems could generate other issues, too—whether to tax consumption rather than income, the extent to which the base needs to be broadened in order to lower rates and still bring in “enough” federal revenue, and other specific new proposed rules on life insurance, annuities, qualified plans and other retirement savings, and benefits.

What does this mean for NAIFA members? We must renew our efforts to educate Congress. Regular meetings at home with Representatives and Senators to teach them the importance of tax rules to middle-income Americans’ financial security are crucial. Events that bring financial advisors to Washington to interact with Congress add to this vital effort.

Remember to mark your calendar for NAIFA’s Congressional Conference from May 23-24, 2017. Robust support for NAIFA’s PAC and PIC will also add to our ability to defend our products and clients. This is a long-haul effort. Congress wants to do tax reform. Lawmakers are looking for consensus on how to do it. That consensus will emerge; it is our job to make sure that when it does, it includes a commitment to tax rules that encourage Americans to own the insurance products that enable them to secure their families’ and their businesses’ financial futures.

Diane Boyle is NAIFA’s Senior Vice President of Government Relations. Contact her at dobyle@naifa.org. Judi Carsrud is NAIFA’s Director of Government Relations. Contact her at jcarsrud@naifa.org.