Deficit panel’s ‘zero plan’ could do a number on insurers, advisers

Preferential tax treatment for retirement programs and insurance products are threatened in a draft proposal from the chairmen of the national deficit commission, according to advocates.
The leaders of the National Commission on Fiscal Responsibility and Reform yesterday released a plan that is designed to be the starting point for deliberation among the panel’s 18 members. The final report is due on Dec. 1.
The draft document outlines domestic spending cuts as well as tax and entitlement reforms that achieve $4 trillion in deficit reduction through 2015, lowering the deficit to 2.2% of GDP. The current deficit is $1.294 trillion, or nearly 9% of GDP. (View the draft presentation of the proposal here.)
One suggestion for tax reform is the “zero plan,” which would eliminate $1.1 trillion of so-called tax expenditures. They include tax breaks for company retirement savings and health care programs, as well as tax-deferred buildup of cash value within life insurance policies. Under this approach, individual tax rates would be streamlined to three categories — 8%, 14%, 23% — and the corporate rate would be lowered to 26%.
“The likelihood is that they would have a fairly significant negative impact on life insurance, annuities and employer-sponsored health benefits,” said Michael Kerley, senior vice president for government relations at the National Association of Insurance and Financial Advisors. “We’re really concerned.”
Groups that promote retirement savings also are wary of the deficit commission’s opening salvo.
“As drafted, one of the options listed in the proposal would eliminate the tax incentive for employers to offer retirement plans to their employees — which ultimately hits low- and moderate-income workers the hardest,” Brian Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries, said in a statement. “The proposed ‘zero plan option’ would decimate the savings rate by eliminating tax incentives for contributing to employer-sponsored retirement plans such as 401(k) plans, likely triggering mass terminations of company retirement plans and directly impacting a worker’s ability to save for retirement.”
Two other tax reform proposals aren’t as draconian. One of them would establish three individual rates – 15%, 25%, and 35% — and limit mortgage deductions to exclude second homes, home equity loans and mortgages over $500,000. It also would modify or repeal unspecified tax expenditures.
Another suggestion from the deficit commission leaders is for Congress to enact comprehensive tax reform by 2012. Its failure to do so would trigger an automatic “haircut” limiting deductions and exclusions.
The commission co-chairmen are Erskine Bowles, a former chief of staff to President Bill Clinton and North Carolina Democratic political figure, and Alan Simpson, a former Republican senator from Wyoming.
Congress will vote on any commission recommendations that achieve backing from 14 of the panel’s bipartisan 18 members. It’s unlikely that many will gain that level of support. The commission could present both majority and minority reports Dec. 1.
Even if the ‘zero plan’ proposal is not endorsed by the full commission, the fact that it is now part of the deficit-reduction milieu in Washington makes Mr. Kerley uneasy.
“I have learned the hard way that ideas in Washington — whether positive or negative — take on a life of their own,” he said. “They never go away.”
Whether Congress will act on them is another question. For months, lawmakers have been unable to agree on tax increases to offset the costs of a tax extenders bill. Whether Capitol Hill has the wherewithal to take up major tax reform in its next session is unclear.
Partisan lines will be more brightly drawn following last week’s elections. Republicans, who are resistant to tax increases, now control the House. The number of moderate Democrats has fallen substantially, strengthening the ranks of liberals who have attacked the deficit commission’s draft recommendations for Social Security and Medicare cuts.
“It looks like there is a potential for even more gridlock,” Mr. Kerley noted. But he said he is keeping his guard up to defend tax breaks for insurance products.
“Things can go desperately wrong when federal officials are desperately looking for ways to reduce the national debt,” Mr. Kerley said.