Coalition Letter on the Tax Penalty Within HR 3210

The Honorable William Thomas

Chairman

Committee on Ways and Means

U.S. House of Representatives

Washington, DC 20515

Dear Mr. Chairman:

The undersigned organizations strongly support the provision contained in H.R. 3210, the Terrorism Risk Protection Act, to repeal the tax penalty that makes it difficult to properly accumulate reserves to pay for man-made catastrophes.

The law contains a huge tax penalty on businesses and homeowners who attempt to purchase such insurance because insurance companies may not deduct an amount equal to the risk of catastrophic terror attacks; amounts that we consider legitimate business expenses. Here is why.

When a taxpayer buys an insurance policy in a catastrophe-prone area, a large part of the premium represents the annual amount that needs to be saved over many years to cover the likely loss from a major catastrophe. Unlike normal fire or theft losses, which occur smoothly year to year and thus are deductible from income, losses from catastrophes are huge. An insurance company might go for many years or even decades before paying claims on a mega-catastrophe such as the September 11 attacks or a huge California earthquake in a major city.

A prudent tax law would recognize that premiums that represent the best estimate of the risk from catastrophe losses should be deductible as a cost of doing business. That is not the case. Virtually all premium income that represents the risk of catastrophe loss flows into taxable income. Effectively our tax laws have created a sales tax on risk premiums for catastrophe losses! This misguided tax also exacerbates the problems of availability and affordability of insurance in catastrophe-prone areas.

Of course, when the catastrophe comes, these claim payments can be deducted against an insurance company’s income that year. Yet that does little good if the insurance company goes bankrupt. For companies that remain solvent, loss carry backs and carry forwards are limited, and the losses might never be fully recognized by the tax code. When it comes to catastrophes, we have created a tax policy that is not much different from the trick coin-toss choice: “heads we win, tails you lose.”

If this problem had been corrected long ago, the insurance industry might not be making the demands that they are today to the Administration and Congress.

Sincerely,

David L. Keating, Senior Counselor, National Taxpayers Union

Paul Beckner, President and CEO, Citizens for a Sound Economy

Robert Fike, Federal Affairs Manager, Americans for Tax Reform

Thomas Schatz, President, Council for Citizens Against Government Waste

Fred L. Smith, Jr., President, Competitive Enterprise Institute

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