[Congressional Record Volume 141, Number 97 (Wednesday, June 14, 1995)]
[Extensions of Remarks]
[Page E1242]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


         WHEN INSURANCE TAX BACKFIRED, CONGRESS PASSED THE BUCK

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                            HON. BOB FILNER

                             of california

                    in the house of representatives

                         Tuesday, June 13, 1995
  Mr. FILNER. Mr. Speaker, newspapers across the country last week 
reported a story that this Congress and the Clinton administration have 
known for several years--the Federal Government is losing almost $2 
billion annually because of a flaw in the tax policy. The analysis, 
prepared by a team of investigative reporters from the Associated Press 
[AP], concluded that a powerful political lobby has succeeded in 
blocking all attempts to close this unintended loophole. I ask 
unanimous consent to reproduce this report in the Congressional Record.
  The political lobby cited by the AP story is the mutual life 
insurance industry. The industry says they have been assured by Ways 
and Means Chairman Bill Archer, according to AP, that Congress isn't 
``looking to advance anything.''
  At a time when Congress is supposedly examining every program for 
possible cutbacks and savings, we should not put any spending item--
including unintended tax loopholes--off limits from scrutiny. My 
colleagues should be aware that Senator Bob Dole recently stated on 
``Meet the Press'' that closing loopholes is not considered a tax 
increase--but merely a correction.
  The unintended loophole in Federal tax policy identified by the AP 
story in section 809, a provision included in 1984 amendments to the 
U.S. Tax Code. The Ways and Means Committee acknowledged in 1989 that 
section 809 had backfired and tried to fix the problem. As reported by 
AP, ``After months of hearings and debate, lawmakers caved to the 
insurance lobby, with--the committee--asking the industry to devise its 
own tax plan.'' No industry recommendations have been forthcoming.
  My own investigations suggest the yearly loss of revenues from 
section 809 is nearly $2 billion, a staggering amount of money. Rather 
than cut food programs for school children and hungry families, 
Congress should use these funds to reduce the Federal deficit.
  Representative Helen Chenoweth and I have introduced legislation, 
H.R. 1497, to repeal section 809, a bill to restore tax fairness and 
close an unintended loophole. The Congress is proposing to ask every 
American to share in the effort to control spending, and to share the 
pain from downsizing the Federal Government. Everyone should be 
expected to contribute to this effort, including mutual life insurance 
companies which now escape their fair share of the tax burden.
  Mr. Speaker, the independent voice of the Associated Press has 
revealed in this article that this $2 billion loophole exists and is 
being used by a handful of the country's largest mutual insurance 
companies. I hope the Ways and Means Committee will hold hearings on 
this situation and approve the legislation Congresswoman Chenoweth and 
I have proposed to correct it.
  Because no other major media outlet has delved into this national 
scandal, the AP story is reprinted below:
           When Insurance Tax Backfired, Congress Passed Buck

                   (By David Morris and John Solomon)

       Washington.--Congressman Bob Filner wants to put billions 
     of extra dollars in the U.S. Treasury, but he is having 
     trouble finding people to take up his cause.
       The California Democrat has introduced legislation designed 
     to close a loophole in federal tax law that allows mutual 
     life insurance companies to avoid paying at least $1 billion 
     in additional taxes each year. The legislation, similar to 
     his bill that stalled in the last session of Congress, 
     appears likely to be blocked again by the politically savvy 
     insurance lobby.
       The problem is not new. For six years, top officials in 
     Congress and at the White House have known that an earlier 
     law intended to increase taxes on the mutual companies 
     backfired. Instead of raising additional tax dollars, 
     documents obtained by The Associated Press show the 1984 law 
     unwittingly gave mutual companies a new deduction that wiped 
     out most of the intended 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 which include such insurance 
     giants as Prudential and Metropolitan Life, pay taxes at half 
     the rate of stockholder-owned insurers 10.8 percent versus 22 
     percent. The disparity was supposed to be corrected through 
     an additional tax on the mutuals, which are owned by their 
     policyholders. The catch came in a provision of the 1984 
     formula that allowed the mutuals to deduct capital gains.
       Congress expected the deduction to be minimal, since 
     mutuals had reported less than $100 million in capital gains 
     between 1979 and 1984. But the mutuals changed 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 caved 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.
       Filner's bill also appears unlikely to solve the problem. 
     He has only one co-sponsor, while the mutual industry 
     apparently has locked up a powerful commitment to keep the 
     bill back. Carroll Campbell, a former South Carolina governor 
     who now 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 were ``non-
     starters.''
       Archer declined an interview. Ted Groom, a spokesman for 
     the mutual side of the industry, said the system is already 
     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 that giant mutual companies 
     were benefiting the most. One 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.
       For years, the mutual companies have argued that the 
     official figures indicating they were paying a low tax rate 
     were erroneous. But they have failed to offer proof. 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.'' But the administration has 
     refused to take a position on the tax measure.
     

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