[Congressional Record Volume 141, Number 65 (Friday, April 7, 1995)]
[Extensions of Remarks]
[Pages E865-E866]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


    ENSURE TAX FAIRNESS, HELP SMALL BUSINESS AND REDUCE THE DEFICIT

                                 ______


                            HON. BOB FILNER

                             of california

                    in the house of representatives

                         Friday, April 7, 1995
  Mr. FILNER. Mr. Speaker, I am joined today by my colleague, 
Congresswoman Helen Chenoweth of Idaho, in introducing the Insurance 
Tax Fairness and Small Insurance Company Economic Growth Act that will 
amend the Internal Revenue Code of 1986 to close a glaring tax 
loophole. When passed, this bill will assure fiscal responsibility in 
our debt management and help ensure tax fairness.
  It is an honor to be joined by my colleague in this bipartisan effort 
and I am certain that, as more Members become familiar with this issue 
following the upcoming recess, we will have additional cosponsors.
  The 104th Congress has seen numerous proposals for tax cuts, budget 
cuts, rescissions, and deficit reduction. Everyone has his or her own 
idea about what should be spared and what should be eliminated--and at 
whose expense. And despite our efforts at deficit reduction, the 
national debt continues to threaten our economic stability.
  Today, we present a proposal to reduce the deficit, help pay for 
these budget-cutting proposals and, at the same time, help small 
business. Our proposal requests no new funding, attacks no one's 
programs, does not increase the Federal deficit and raises no new 
taxes.
  This legislation is designed to do away with section 809 of the Tax 
Code that both the U.S. Treasury and the General Accounting Office 
[GAO] have termed as flawed and unworkable, and contrary to what 
Congress intended.
  Our bill would close a $2 billion dollar loophole--that is $2 billion 
per year. Currently, a few giant mutual life insurance companies 
benefit from this loophole and do not pay their fair share of taxes. 
Closing this loophole would only require that these companies pay their 
full share of taxes. All that is required is a technical correction to 
existing tax laws affecting life insurance companies. At the same time, 
the Nation's small insurance companies would be helped by our efforts 
and would receive significant tax relief.
  Under the terms of section 809 of the Federal Tax Code, the few giant 
mutual life insurance companies are able to increase or decrease taxes 
on their business activities by manipulating the sale of assets. That 
legislation would repeal section 809 of the Tax Code and place a cap on 
the amount of dividends that are tax deductible. This action would help 
achieve the revenue which Congress and the treasury intended for the 
mutual life insurance industry.
  This $2 billion annual windfall dates back to 1984 when Congress 
attempted to correct the taxation of mutual life insurance companies. 
That corrective action was intended to provide income to the U.S. 
Treasury based on equity among life insurance companies--both stock and 
mutual. After a short-term increase in taxes received, the revenue 
actually began 
[[Page E866]] decreasing. Four years later, the Treasury and the 
General Accounting Office [GAO] admitted something was wrong. The 
intended revenues were not being generated.
  In fact, certain large mutual insurance companies have been paying no 
tax on earnings from business activity since approximately 1986. 
Obviously, this was contrary to congressional intent. Congress asked 
the insurance industry 5 years ago to come up with a solution to the 
shortfall. Our request is still valid, Mr. Speaker, and we can no 
longer wait for a response.
  We must get to the bottom of this matter by having a congressional 
hearing that lays all of the facts on the table and presents all sides 
of the issue. This legislation will lead to full disclosure of all 
relevant material--and settle what the U.S. Treasury and other tax 
experts agree is the fundamental fairness involved.
  There has been considerable interest in our legislation, including 
national columns supporting the goals of the bill. There is bipartisan 
support across the political spectrum. The national Coalition to Close 
the Loophole and Put Our Kids First brings 173 grass-roots groups to 
this effort.
  Mr. Speaker, the state of the current budget deficit threatens our 
Nation's fiscal security and requires immediate and decisive action. Of 
all the difficult choices Congress faces, none are more agonizing than 
those involving taxpayer dollars. The loss of $2 billion in annual 
revenue makes the choices between military spending, middle class tax 
cuts, welfare reform, veterans' programs, and social services even more 
difficult than need be. Our legislation is about the ability of this 
Nation to tax all citizens equally, and making sure that Federal 
dollars are spent on programs that are truly in the national interest.
  Closing the section 809 loophole makes a lot of sense--and it would 
be a courageous decision. It would show the Nation that Congress has 
its priorities back in order.
  I urge the bill's careful consideration through the congressional 
process.
  I ask that an information sheet entitled ``What is Section 809 and 
Why Is It an Issue?'' and a recent editorial from the San Diego Union-
Tribune be included in the Record.
         [From the San Diego (CA) Union-Tribune, Mar. 26, 1995]

        Corporate Welfare--Mutual Insurance Avoids Federal Taxes

  Historian Richard Hofstadter pointed out in his Pulitzer Prize-
winning book ``The Age of Reform'' that special interests are 
especially adept at evading the spirit and intent of government reforms 
directed at them.
  That certainly seems to be the case with the mutual insurance 
industry, which has managed for the last 11 years to evade paying its 
fair share of federal taxes.
  In 1984, Congress rewrote the tax code to ensure that mutual 
insurance companies were taxed at the same level as stock insurance 
firms. Both companies sell the same type of policies. The
 difference between them is that mutuals are owned by policyholders, 
     while stock companies are owned by stockholders.
       But a funny thing happened on the way to implementing this 
     equitable change in the tax code: The mutuals figured out a 
     way around the revision.
       By simply altering the way they accounted for their assets, 
     the mutual firms discovered they could pay much less in taxes 
     than the reform intended. Some mutuals, moreover, have been 
     able to avoid paying any federal taxes on their earnings.
       Not long after arriving in Washington in 1993, Rep. Bob 
     Filner, D-San Diego, introduced a bill to remedy the 
     situation. His measure was intended to close the tax loophole 
     that enables mutual companies to avoid coughing up what 
     Congress intended them to pay.
       As a former history professor, Filner should have known 
     from the beginning what he was up against. Even so, he was 
     shocked at the ease with which his bill was stonewalled in 
     committee and ultimately buried by the politically powerful 
     insurance lobby.
       In 1989, the mutual insurance lobby blocked House Ways and 
     Means Committee Chairman Dan Rostenkowski from trying to 
     close the same loophole. Instead, the industry assured 
     lawmakers that it would come up with a tax proposal to solve 
     the problem.
       Nearly six years have passed, and still there is no plan 
     from the industry. Nor is one likely soon, because the 
     mutuals are content with the status quo.
       Not so for Filner. He intends to reintroduce his measure, 
     and with bipartisan support this time.
       Problem is, there is little enthusiasm on Capitol Hill 
     these days for any tax increase. What's more, the Republican 
     majority in the House is preoccupied with passing the 
     ``Contract With America.'' And many lawmakers on both sides 
     of the aisle are loath to take on the insurance lobby.
       But the insurance industry's evasion of the clear intent of 
     Congress should not go unchallenged. Filner's reform would 
     recoup nearly $2 billion in taxes that the mutual companies 
     avoid paying each year.
       Republicans have taken a great deal of flak for their 
     efforts to pare runaway welfare benefits. Here's an 
     opportunity for them to go after one of the many abuses in 
     ``corporate welfare'' that also are a drain on the federal 
     treasury.
                                  ____

              What is Section 809 and Why It Is an Issue?

       Section 809 is a provision of the Federal Tax Code 
     authorized by Congress in 1984 to limit the deduction of 
     dividends paid by mutual life insurance companies.
       While both mutual and stock companies sell identical 
     products (life insurance), mutual companies are owned by 
     their policyholders and stock companies are owned by their 
     shareholders. Congress recognized a separate provision of tax 
     code was needed to account for this difference in ownership 
     that distinguishes these two corporate structures. Congress 
     intended that Section 809 would make the tax treatment of 
     mutual life insurance companies equal to that of stock life 
     insurance companies.
       Mutual life insurance companies are among the largest 
     financial services corporations in the United States. Like 
     the rest of corporate America, shareholder owned life 
     insurance companies pay dividends to their owners after 
     federal income tax. Section 809 was enacted to treat part of 
     the dividends that mutual life insurers pay to their owners 
     in the same way.
       Insurance companies gather income from two sources. One is 
     income from current operations (wages and salary) and the 
     other is from capital gains, or the appreciation in value of 
     property held by the taxpayer that occurs from general 
     economic conditions.
       Since 1984, large mutual life insurance companies have been 
     able to manipulate their treatment of capital gains income in 
     an unintended way. Section 809 allows large mutual life 
     insurers to drive their tax on operating income to zero by 
     claiming enough income from capital gains to offset the 
     operating income. Any other corporation or individual tax 
     payer, however, would have to pay federal income taxes on 
     both sources of income. This result was not anticipated by 
     Congress in 1984, as mutual life insurance historically 
     recognized very little capital gains income before 1984.
       This unique provision allows large mutual life insurance 
     companies to escape an estimated $2 billion in income taxes 
     on corporate earnings annually, a unique form of corporate 
     entitlement and a gross example of corporate welfarism.
       The American public will be outraged if they learn of this 
     loophole before Congress has the courage to stand up and 
     close it. This is particularly understandable since Congress 
     is cutting the benefits and programs of millions of ordinary 
     American citizens. Closing this loophole--this gross example 
     of corporate welfare--would mean $10 billion dollars toward 
     deficit reduction over the next five years.
     

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