The Hidden Entitlements

7. Insurance companies and products

Insurance companies enjoy a wealth of federal tax breaks, both at the corporate level and for their customers. In total, these tax expenditures are expected to cost $204 billion over the next seven years. All of them ought to be reevaluated to determine if any important public purpose can justify that large cost. The tax subsidies include:

Interest on life insurance savings. Interest and other investment in come earned on accumulated life insurance premiums is not taxed either as it accrues or when received by beneficiaries upon the death of the insured.In recent years, many corporations have taken advantage of this tax shelter by borrowing against insurance policies on their employees, and deducting the interest while the policy earns tax-free income. (Both President Clinton and Congress have proposed to curb this abuse.)

Small property and casualty insurance companies. Insurance companies that have annual net premium incomes of less than $350,000 are exempt from tax; those with $350,000 to $2,100,000 of net premium incomes may elect to pay tax only on their investment income.

Deduction of unpaid property loss reserves of property and casualty companies.Property and casualty insurance companies can deduct not only claims paid,but also "loss reserves" that exceed actual claims expenses.

Special treatment of life insurance company reserves. Likewise, life insurance companies can deduct "reserves" that exceed claims actually paid. Insurance companies also aren't taxed on investment income stemming from so-called "structured settlement amounts."

Insurance companies owned by tax-exempt organizations. Generally,the income generated by life and property and casualty insurance companies is subject to tax, albeit by special rules. Insurance operations conducted by fraternal societies and "voluntary employee benefit associations,"however, are tax-exempt. Some of the leading "non-profit" fraternal society insurers write tens of billions of dollars in insurance coverage--and pay their top executives princely salaries (as much as $900,000 per year).Treating these high-powered insurance activities as tax-exempt is an abuse of non-profit status. The tax exemption ought to be repealed (as the Treasury Department suggested back in 1984).

Blue Cross and Blue Shield. Although these organizations do not qualify as tax- exempt charities, they get exceptions from normal insurance company income tax accounting rules that effectively eliminate all their taxes.

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