Tax Panel Proposal Worries P-C Insurers

By Arthur D. Postal Washington Bureau Chief

NU Online News Service, March 3, 2:55 p.m. EST, Washington?The property-casualty insurance industry is voicing concerns about a recommendation from an influential congressional committee that Congress abolish a tax provision that encourages p-c companies to buy municipal bonds.[@@]

The proposal from the congressional Joint Tax Committee would eliminate an estimated $1.2 billion in industry tax benefits over the next 10 years. It would do so by extending the so-called "pro rate disallowance rule," which now applies only to banks, to all corporations.

The industry's concerns were voiced in a letter sent Monday to Sens. Charles Grassley, R-Iowa, and Max Baucus, R-Mont., the chairman and ranking member, respectively, of the Senate Finance Committee.

The letter said that the p-c industry held $183 billion in municipal bonds as of 2002, the latest year for which statistics are available, and that this amounted to more than 10 percent of all municipal bonds outstanding. This sum constituted almost 20 percent of total p-c industry financial assets, and more than 50 percent of municipal bonds owned by corporations in 2002, the letter said.

There is no legislation yet introduced that calls for eliminating such deductibility, one industry lobbyist cautioned, and no timeline for Congress to consider one.

Congress is under pressure to raise revenues in order to finance making permanent tax cuts first enacted in 2001 and 2003. These include raising the threshold for taxation of estates, and eliminating it in 2010, and reducing the tax on corporate dividends paid to individuals.

The pro rata disallowance rule bars taxpayers subject to it from deducting the interest paid to finance purchase of municipal bonds held in their portfolios.

An industry lawyer advising one of the p-c trade groups said the Joint Tax Committee recommendation probably means that if half the interest-bearing assets of a p-c company are in municipal bonds, then half of the interest used to finance that company's assets would not be deductible.

The letter noted that when the provision allowing deduction of interest on loans used to purchase bonds by banks was eliminated effective in 1987 for banking institutions, banks' share of municipal holdings dropped from 29 percent in 1986 to 6.9 percent in 2002.

The letter noted that Sens. Grassley and Baucus, joined by 21 other senators, wrote a letter to the Treasury Department in 1996 urging that a similar proposal to eliminate the tax deductibility of money used to purchase bonds owned by p-c companies be rejected.

The 1996 letter, which was attached to the latest missive, said that Sens. Grassley and Baucus, and their colleagues, rejected calls to eliminate the provision because it would lower the effective rate of return to corporations from municipal holdings. Therefore, the letter said, current corporate purchasers would elect to invest in other securities that offer a higher after-tax yield.

"The absence of these companies from the municipal bond market could cause a serious decline in the demand for these bonds," the letter said. "To compensate for such a shift, governments would have to raise the rate of return on their bonds resulting in an increase in their costs of borrowing."

The letter from the trade groups said, "For these reasons, you successfully opposed this proposed extension of the pro rata interest disallowance rule in 1996. And for the same reasons today, this proposal would adversely impact both state and local governments and taxpayers. We urge you to reject the inclusion of this ill-conceived measure (including its use as a ?pay-for') in any legislation."

The letter was signed by representatives of the American Insurance Association, the National Association of Mutual Insurance Companies, the Property Casualty Insurers Association of America, and the Reinsurance Association of America.

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Tax Panel Proposal Worries P-C Insurers

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