Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, June 1, 1995 TAG: 9506010061
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: DAVID MORRIS AND JOHN SOLOMON ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Long
Efforts by Democrats and Republicans alike to correct the problem have been stopped by the politically savvy insurance lobby.
Documents obtained by The Associated Press show that instead of raising huge amounts of additional tax dollars, the 1984 law unwittingly gave the mutual companies a new deduction that wiped out most of the intended tax increase.
``We compromised away too much,'' said Rep. Pete Stark, D-Calif., a frequent critic of the insurance industry and an architect of the 1984 plan.
Accounting studies show the mutual insurance companies pay taxes at half the rate of stockholder-owned insurers - 10.8 percent vs. 22 percent. The mutuals include such insurance giants as Prudential and Metropolitan Life.
The 1984 law, known as Section 809, was designed to equalize the situation after changes in the industry and in the tax code left the mutuals paying so much less. It essentially levied an additional tax on the mutuals, which are owned by their policyholders.
The catch came in a provision in the new formula that allowed the mutuals to deduct their capital gains. Congress expected the deduction to be minimal, because the mutuals had reported less than $100 million in capital gains between 1979 and 1984.
The mutuals responded, however, by making a change in their accounting, declaring nearly $15 billion in capital gains over the next five years.
With encouragement from the Bush administration, Congress tried to fix the problem in 1989. But after months of hearings and debate, lawmakers yielded to the insurance lobby, with then-House Ways and Means Committee Chairman Dan Rostenkowski asking the industry to devise its own tax plan.
That, Stark scolded, ``was like putting them on a steak and ice cream diet and telling them to get their cholesterol and fat down.''
The industry convened a study group, but eventually abandoned the effort.
Legislation that would have raised taxes on mutuals stalled in the past session of Congress. It has been reintroduced by Rep. Bob Filner, D-Calif., but has only one co-sponsor.
The mutuals industry apparently has locked up a powerful commitment to keep the bill buried. Carroll Campbell, a former South Carolina governor who heads the American Council of Life Insurance, said he recently received assurances from Republican Ways and Means Chairman Bill Archer that bills to raise taxes are ``non-starters.''
``They aren't looking to advance anything,'' Campbell said.
Archer declined an interview.
Ted Groom, a spokesman for the mutuals side of the industry, said the system already is unfair. He contends that changing the law to collect more taxes would drive mutual companies out of business.
``We are currently overtaxed,'' he said in an interview.
Still, study after study by independent agencies has shown that the 1984 law backfired, and giant mutual companies were benefiting the most.
A 1989 Treasury Department study said the law was supposed to generate $5.2 billion from the mutual insurance industry from 1984 to 1986, but had fallen $2.4 billion short. Other estimates put the shortfall as high as $2 billion a year.
Most large mutual companies have entirely offset the amount of new taxes they were supposed to pay. Some even claim the formula left them with a negative tax bill, and one company has sued to get the money back from the government.
The government's expert witness in that case estimates that if the company wins, mutual companies could get refunds of up to $5 billion.
The mutual companies have argued for years that the official figures indicating they were paying a low tax rate were erroneous. This year, the industry apparently changed its tack, acknowledging the 809 section worked in its favor in the early years.
But mutual companies also point to a 1995 analysis by Moody's Investors Service, which predicts the industry will see a sharp increase in taxes this year because a poor year gave them fewer capital gains to deduct.
Girding for a new fight in Congress, insurers donated an estimated $25 million to the national parties and congressional candidates in the past two elections. They also have hired some of the most powerful lobbyists in Washington, including Thomas J. Downey, a former member of the House Ways and Means Committee.
As the lobbyists lined up in opposition, Filner tried to get help from the Clinton administration, which has declared war on ``corporate welfare.'' The administration has refused to take a position on the tax measure.
``We are aware of the complex issues relating to this matter and will continue to review various options,'' then-Treasury Secretary Lloyd Bentsen wrote in February 1994 to a senator who had asked about the issue.
Filner doesn't buy the explanation that the issue is overly complex.
``Whenever I hear such protestations in relation to federal policies which provide huge tax benefits to a few giant corporations, I am certain the complications more likely have been created to protect the privileged status of those interests,'' Filner wrote Bentsen last year.
by CNB