BAT Could be BAD if Applied to Reinsurance
Since his presidency began, President Donald Trump has been adamant about implementing a border-adjustment tax (BAT) to improve domestic manufacturing. The idea has gained steam in the House as well. Originally introduced under Speaker Paul Ryan (R-Wisconsin) and Kevin Brady (R-Texas), the proposal would lower the corporate income tax rate to twenty percent and convert it into a destination-based cash-flow tax, making the corporate income tax border-adjustable.
What exactly does border-adjustable mean? Essentially, U.S. based business will no longer be able to deduct goods purchased from foreign countries (imports) from their tax bill but they will no longer be subject to taxation on sales revenue earned abroad (exports).
This poses a potential problem for Florida. The House plan is unclear about whether or not this proposal would apply to financial transactions. If it does, Florida could be severely hampered.
This is because Florida relies heavily on reinsurance. Since hurricanes are a constant threat to the Sunshine State, insurers cede their risk to reinsurance companies to mitigate their losses in the case of a catastrophic event, with the cost of reinsurance being passed down to the policyholders. U.S.-based insurers often cede their risk with foreign reinsurance companies, spreading out this risk and lowering costs.
If the border adjustment is applied to financial transactions, it would amount to a twenty percent tax increase on the reinsurance premiums ceded by U.S. insurers to foreign reinsurance companies. Florida TaxWatch research finds that this increase would increase the cost of property insurance for Florida homeowners by up to $430 a year per policyholder.
The effects on the economy are even more staggering. The direct cost of a border adjustment on reinsurance would result in a reduction in economic activity by up to $5.0 billion, worker earnings falling by as much as $2.6 billion, and up to 77,402 jobs lost.
Obviously, to Florida’s Congressional Delegation, these numbers are eye-opening. No elected official wants to come back to their constituents and hear that their decision to include reinsurance in the BAT raised homeowner premiums and cost people their jobs and livelihood.
Florida’s Congressional Delegation must be the voice of reason in this debate. Explaining the potential impact of the BAT on reinsurance to Congress is critical to ensuring that it is not included in the final product.