Chamber Supports H.R. 808, the Life Insurance Tax Simplification Act of 2003
October 16, 2003
The Honorable Bill Thomas
Committee on Ways and Means
United States House of Representatives
Washington, DC 20515
Dear Chairman Thomas:
On behalf of the U.S. Chamber of Commerce, the world's largest business federation, representing more than three million businesses and professional organizations of every size, sector and region, I am writing to urge your support in repealing two sections of the Internal Revenue Code - section 809, which provides for the reduction in certain deductions of mutual insurance companies, and section 815 that applies to policyholder's surplus accounts of stockowned life insurance companies. Sections 809 and 815 are outdated, have no economic purpose and are inefficient.
Therefore, we urge you to support H.R. 808, the Life Insurance Tax Simplification Act of 2003, introduced by Representative Amo Houghton (R-NY) and cosponsored by a broad bipartisan coalition of Ways and Means Committee members. H.R. 808 repeals section 809 and section 815.
Under section 809 the amount of a policy holder's dividends that a mutual life insurance company can deduct is limited based on a complex formula relying in part on the earnings of the 50 largest stock life insurance companies. The purpose of section 809 was to ensure that mutual life insurance companies did not have a competitive tax advantage over stock life insurance companies. The formula is outdated because in 1984, when this section was enacted, there were over 100 mutual life insurers. Today there are only about 40 mutual life companies (only a few are large companies) that comprise only 10 to 15 percent of the industry. The calculation is further flawed because it looks at neither the amount of policyholder dividends the mutual company pays nor the actual income of the mutual insurer.
The economic impact of section 809 is that mutual life insurers reduce the amounts paid to policyholders as dividends or benefits, thereby increasing the cost of insurance. Repeal of section 809 would result in a more neutral taxation of stock and mutual companies and allow consumers to focus more on non-tax considerations when choosing their insurance providers. Not only is there a negative economic impact, section 809 also has administrative burdens not only for companies but for the government. Every year the IRS must compile and calculate certain industry data to be used in the required calculation.
Section 815, created in 1959, also is a carryover from times that no longer match our economic conditions. Section 815 established an accounting mechanism called a policyholder surplus account ("PSA") to account for amounts of tax that stock life insurance companies were permitted to defer on the part of their underwriting income that was not distributed to shareholders. In 1984, Congress eliminated deferral of tax on underwriting income, but did not address the issue of PSAs which are merely accounting entries and do not contain real money. However, they remain subject to tax if certain triggering events occur. Since companies are not willing to trigger the tax on the account, Section 815 also raises little or no revenue to the government. It does, however, directly inhibit the business decisions of stock companies with PSAs and results in burdens on the companies.
Both sections 809 and 815 were designed when competition existed between stock and mutual life insurance companies. The stock and mutual segments of life insurance are no longer competing. Instead, life insurers are competing in the global finance services marketplaces.
In last year's economic stimulus bill, Congress, recognizing that section 809 was outdated, suspended the section for tax years 2001, 2002, and 2003. In addition, President Bush included in his fiscal year 2003 budget submission a proposal to repeal section 809 permanently. Sections 809 and section 815 are no longer relevant and have no economic purpose. A full repeal of section 809, as well as a full repeal of section 815, is the only solution that will relieve taxpayers and the government from these complex provisions. Again, we urge your support of H.R. 808.
R. Bruce Josten
Executive Vice President, Government Affairs
U.S. Chamber of Commerce