by the Night Writer

Are you one of the “95 percent” of Americans promised a tax-cut by President Obama? By all means, keep your fingers crossed and “hope” you get a little taste before pending “changes” in other tax laws and regulations swipe it right back out of your pocket.

A couple of weeks ago I highlighted a move by Congressional Democrats to tax your employer-sponsored health benefits. Today I have a couple more stories that suggest more back-door tax increases on your insurance are in the works.

One of the major features of life insurance and annuities has long been the ability to “build-up” cash values tax-free inside certain types of life polices and within annuities, with income taxes being taken when the funds were withdrawn, presumably in retirement when your income tax bracket is (hopefully) lower. It’s a similar mechanism to how a 401k works. Additionally, life insurance death benefits paid to your survivors have also been tax-free. All these tax deferrals act as incentives for consumers to take individual responsibility in planning for retirement and the financial security of one’s family.

This is not an strategy reserved only for the wealthy; cash value life insurance policies and annuities are mainstays of middle-class financial planning, while the more affordable term life plans (with no cash build-up) provide an important and accessible safety net for families with common sense but modest means. There are those, however, who love raising taxes every bit as much as they hate the thought of the individual doing anything for himself when the government could be doing it less efficiently. An example on the radar screen is out west where the Oregon State Revenue Committee is claiming that exempting these private funds imposes too much of a burden on the state which currently can’t get its hands on that money:

The federal government exempts life and annuity benefits from taxation, but Rep. Chuck Riley, D-Hillsboro, Ore., the sponsor of the Oregon bill, H.B. 2854, has argued that conformity with federal income tax rules is too costly, and that Oregon should tax some kinds of income now excluded from federal taxable income.

If passed as written, the bill would take effect on or after Jan. 1, 2010.

H.B. 2854 was first read March 2. To pass, the bill would need approval by a three-fifths majority.

The National Association for Life Brokerage Agencies, Fairfax, Va., has put out a statement opposing the bill, noting it would tax both the death benefits and earnings on the inside build-up of life insurance and annuities.

This “unfairly targets individuals and families who have taken responsibility for their financial future by preparing for retirement and planning for unforeseen circumstances,” NAILBA says in the statement. “Any changes to the tax system must not limit or disadvantage protection and security products, but rather strengthen them.”

It should be pointed out that “conforming” with the federal regulations doesn’t “cost” Oregon anything; it merely keeps money away from them, which really galls those inclined to think that your money (and children) belong to the State. It is also part and parcel of the mindset that, as with the earlier health insurance article, portrays having life insurance as a lucky break and unfair advantage and therefore worthy of confiscation and redistribution. While this particular article refers to Oregon only, if it passes it’s not much of a stretch to see other states trying the same thing.

On a related note, there is a recurring movement afoot in the federal government to repeal the McCarran-Ferguson Act which provides a limited anti-trust exemption to the insurance industry. This arises periodically, but now they are using the AIG imbroglio to justify this latest grab (though the connection is tenuous):

Two House Democrats have introduced a bill that would repeal the McCarran-Ferguson Act insurance industry antitrust exemption.

The bill, H.R. 1583, the Insurance Industry Competition Act, would give the U.S. Department of Justice and the Federal Trade Commission the authority to apply antitrust laws to anticompetitive behavior by insurance companies.

The bill would keep the McCarran-Ferguson provision that puts jurisdiction over insurance regulation in the hands of the states.

The bill was introduced by Reps. Gene Taylor, D-Miss., and Peter DeFazio D-Ore.

Taylor and DeFazio have introduced similar bills in earlier Congresses. They say the controversy over bonuses paid to American International Group Inc., New York, employees highlights the need for action on the antitrust issue.

The current insurance industry antitrust exemption gave AIG a free pass to become “too big to fail,” and “now the U.S taxpayers are on the hook to bail them out or risk even further turmoil in an already fragile economy,” Taylor and DeFazio say in a statement. “This legislation would close that exemption.”

Admittedly, McCarran-Ferguson is a rather esoteric issue in a complex environment, and “anti-trust” always sounds like it’s in the best interests of the public. What the Act does, however, is allow states to regulate insurance companies operating within their jurisdiction rather than bringing it all under federal oversight. The result, however, is to make the insurance products — both life & health and property & casualty — more affordable. Federalizing insurance regulation would, like the initial efforts at “health-care reform” would strengthen the biggest players while harming or even eliminating the smaller companies, and would result in higher costs for consumers, not lower.

As someone who’s worked in marketing and advertising in this industry for a long time I know that I have complained on many occasions about the challenges of working with 50 different state insurance commissions in order to get products and even certain advertising approved. While I’ve often thought it would be simpler to deal with just one entity I also see how state control benefits consumers.

Politicians have long been masters of saying one thing and doing another; of staging a distraction in the park while the pickpocket goes through the crowd. When you hear the music playing, be sure to look over your shoulder.

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