As the first dead leaves begin to fall, all eyes inside the Beltway are turned toward the impending tax reform storm — none more so than within financial services.
The concerns are genuine and the potential fights are familiar. Once again, the estate tax, inside buildup and even contributions to 401(k)s could be in the crosshairs.
“There does seem to be some appetite to at least explore those areas,” said Kevin Mayeux, chief executive officer of the National Association of Insurance and Financial Advisors. “Of course, we believe that inside buildup and death benefits are pretty much the Holy Grail.”
Everyone knows what is at stake. Republicans know they are in charge of government, but have no legislative wins to campaign on to this point. Time is running out.
Democrats have gained strength from successful battles to preserve the Affordable Care Act and stave off President Donald J. Trump’s refugee ban.
These fights over the estate tax and inside buildup have been fought and won in years past, enough to make some of these issues appear to be no more than bargaining chips. However, a 2014 tax reform paper written by a now ex-congressman carries just enough weight to keep the industry from getting complacent.
Former House Ways and Means Committee Chairman Rep. Dave Camp, R-Mich., proposed levying as much as $583 billion in taxes and fees over the next 10 years from 50 proposals that have an impact on the insurance industry, a NAIFA legislative expert said at the time.
It is the wrong time to be removing incentives for Americans to buy insurance, Mayeux said. Studies repeatedly show that Americans are carrying far less insurance than they need to survive an unexpected death in the family, as well as being woefully underfunded for retirement.
Potential Tax Cuts
While the White House and congressional leadership had released few details as of press deadline, the areas of tax reform agreement are well-known.
House Speaker Paul Ryan, R-Wis., and Trump campaigned on similar tax-cut plans. Both would consolidate the number of individual income tax rates to three from the existing seven and slash the top income tax rate from 39.6 percent to 33 percent.
Both would reduce taxes on corporations, in largely similar ways. Those things would seem to be viable in some form. From there it gets tricky.
On the campaign trail, both Ryan and Trump supported elimination of the estate tax. But analysts note the estate tax applies to only two out of every 1,000 estates — in other words, the superrich. That includes the president, as well as several members of his cabinet.
The implication here is it will not take much convincing to remove the estate tax from the chopping block. That leaves pretax contributions to insurance and
retirement plans as an alluring target for tax reformers. But unlike the estate tax, these pretax contributions are extremely popular with Americans.
So while administration officials such as Treasury Secretary Steven Mnuchin continue to claim these options are not being considered, whispers remain.
“There is an appetite out there to try and move people into more of a Roth-type product,” Mayeux explained. “From our perspective, we think that providing Americans with a choice is good, but steering them into just being able to be in a Roth-type product is bad.”
Supporters of this idea argue that it just changes the tax treatment from the withdrawal period to the contribution period. In other words, the government gets its take up front.
Still, there is expected to be wide
pushback from many different groups who argue that the tax-free status is what motivates people to save for retirement in the first place.
“We think they’ll save less and ultimately that’s going to wind up being a bad move for this country because we’ll have people less prepared for retirement,” Mayeux said. “But we do understand that this will be a conversation piece as the Congress and the administration go through this process.”
Health Care Reform
Tax reform is expected to overshadow health care reform as the major issue facing Congress — at least in the short term, some observers told InsuranceNewsNet. Compounding the situation is the fact that there are not many days left in the congressional calendar to take action this year.
“In the short term, health care reform will be crowded out by other things Congress must do by Sept. 30 — the budget resolution to avoid a government shutdown and raising the debt ceiling,” said Michael Keegan, senior vice president with Health Agents for America. “Tax reform is a real focus now, plus the infrastructure bill. And then on top of all that, you have disaster relief.”
“Tax reform is the larger, more pressing issue. Health care reform is still being discussed but it does appear that tax reform is the bigger issue.”
The Senate Health Committee scheduled two hearings in early September to obtain testimony on ideas to stabilize the individual health marketplace. “Something narrow could emerge from that,” Keegan said, but added that an all-out effort to revisit “repeal and replace” could be far into the future.
When it comes to health care reform, “the big question is how you fit something as massive as that in there when you have only 12 legislative days in September to get the government funded, get the flood insurance program funded, get the Children’s Health Insurance Program funded,” said Diane Boyle, NAIFA senior vice president of government relations.
“After that, you’re looking at increasing the debt ceiling and tax reform as priorities, so I think it’s going to be incredibly tough to fit health care reform in there,” she added.
The National Association of Health Underwriters said this summer that its priority is stabilizing the individual health insurance market, while maintaining a role for the agent and broker. NAHU’s National Legislative Council Chair Annette Bechtold said that the association believes market stabilization is the most pressing health care-related issue facing Congress now.
“There is a bipartisan effort out there to stabilize the individual health insurance market, but the question is whether they will come up with solutions,” Bechtold said.
The individual health insurance marketplace covers the smallest percentage of Americans, she noted, with the bulk of Americans covered through their employers or through Medicaid. But with the small group market and the individual market sharing the same risk pool, stabilizing the individual market is crucial.
The Affordable Care Act was first introduced in 2009 and did not become law until the following year, so any repeal or replace effort could be years away from becoming reality.
Could 2018 be the year that the ACA is relegated to the trash heap? Keegan said he believes Republicans will not want to take a chance of overturning a law that is still popular with a majority of the American public and then face re-election.