The District of Columbia would become a domestic tax haven for insurers setting aside reserves to cope with natural catastrophes if newly proposed legislation in the US Congress becomes law.
A bill introduced by the district’s nonvoting delegate, Congresswoman Eleanor Holmes Norton, would designate the US capital as a special jurisdiction where reserves and related investments from insurers and reinsurers could be set aside free of federal taxes.
The bill targets a piece of reserves now held offshore in domiciles such as Bermuda, Representative Norton said.
A rough year in the United States for natural catastrophes makes the District of Columbia National Disaster Insurance Protection Act particularly timely, Rep. Norton said in a statement issued today [Oct. 11].
“Retaining funds here in the US would fuel both the local and US economies, would provide the protection of US laws for individuals and businesses with property and casualty insurance and would protect US taxpayers, who would otherwise likely have to pick up the tab if there were a failure in reserve fund availability,” she said.
Congress’ ultimate control of district affairs is usually a sore point for local officials. However, in this case, it could bring a new advantage, said Lawrence Mirel, a former commissioner of the district’s Department of Insurance, Securities & Banking who worked on the legislation.
The bill requires companies with reserves held in the district to maintain a physical office. The district government could also impose an excise fee — as non-US jurisdictions do.
“The best way to look at it is to look at what it did for Bermuda,” said Mirel, a lawyer with Wiley Rein LLP.
Proposals to limit the tax deductibility of reinsurance premiums paid by US-based, foreign-owned insurers to non-US-based affiliates have been a frequent issue in Congress.
While legislation to address what many see as a tax disparity that benefits non-US-owned companies died at the end of the last Congress, similar terms surfaced earlier this year in an Obama administration budget proposal.
The Norton measure is a welcome fresh take, said R.J. Lehmann, deputy director of the Heartland Institute’s Centre on Finance, Insurance, and Real Estate.
“While further investigation is warranted into how the DC catastrophe reserve accounts would interact with the tax code, with state and international regulation and with accounting rules, we think this approach offers great promise for fostering a property insurance system that is both affordable and risk-based,” Mr. Lehmann said.
While Rep. Norton is the ranking Democrat on the House Subcommittee on Economic Development, Public Buildings, and Emergency Management, she is a nonvoting member of the minority party. She introduced a similar and unsuccessful measure last year.
Given the prevalence of catastrophes in 2011, however, Mr. Mirel is optimistic the bill will attract Republican support. “We can’t do this with just her. We need to attract some other lawmakers,” he said.
Last year Washington DC’s chief financial officer Natwar Gandhi first proposed transforming the perpetually cash-strapped American capital into an on-shore business domicile — saying the city had the potential to become “Bermuda on the Potomac.”
“Natwar Gandhi [suggests bringing] in dollars from rich corporations, namely banks and insurance companies who currently park millions of dollars abroad in island tax havens,” reported “Washington Herald” columnist Herbert Jaffe. “Gandhi wants to change federal tax laws and make DC ‘Bermuda on the Potomac’.
“Sounds reasonable. ‘The financial centre of the country is in Washington now’, Gandhi tells me. ‘All the trading can be done in New York, but the decisions are made here’ …”
“So why not make the capital into an on-shore tax haven, asked Mr. Jaffe? Why not lure all of those Bermuda-based insurance companies and their millions back on-shore by turning the District of Columbia into a corporate-friendly zone?
“Having no vote in the House or the Senate, DC is at the mercy of our suburban neighbours,” he said by way of answering his own question. “Every time DC floats a tax haven idea, politicians from Maryland and Virginia see it as giving the central city a competitive advantage. ‘It’s an idea we have explored in the past’, council finance chair Jack Evans says. “Maybe it’s time to do it again. I’m all for it’.”