Pros and Cons Arguments for the proposals 1. Health maintenance organizations commonly are structured so that their operation is essentially equivalent to providing insurance coverage for medical expenses, and it is unfair to give them more favorable tax treatment than other providers of health insurance coverage. 2. Continuing exempt status for health maintenance organizations gives them an undesirable competitive advantage, not only over taxable insurers providing comparable coverage of medical expenses, but also over taxable health service providers providing similar medical services. 3. The special 25-percent of claims expense deduction for Blue Cross/Blue Shield organizations creates a competitive advantage for the health insurance business of these organizations compared to the health insurance business of other insurance companies. Arguments against the proposals 1. Health maintenance organizations are service providers as well as insurers, and taxing them on the grounds that they operate in a manner equivalent to insurers is unfair. 2. Taxing health maintenance organizations like insurance companies would in many instances prove administratively cumber some. 3. Taxing health maintenance organizations, even if they are given special tax advantages, contravenes Congressional policy to promote that form of providing health services or coverage by granting the provider organizations tax-exempt status. 4. Existing Blue Cross/Blue Shield organizations typically provide health insurance coverage to individuals and small groups who might not otherwise be able to purchase such coverage from other insurance companies. A significant increase in the tax liability of such an existing Blue Cross/Blue Shield organization might force the organization to drop this special coverage. d. Treatment of foreign life insurance companies Present Law In the case of a foreign life insurance company, present law requires that income effectively connected with the conduct of an insurance business in the United States be increased by an imputed amount to the company, if its surplus held in the United States is insufficient in relation to a percentage of its total insurance liabilities on its United States business. The effect of this imputation rule is to prevent foreign companies from artificially reducing the amount of investment income subject to tax in the United States. Under the imputation rule, if the required United States surplus exceeds the company's actual United States surplus, the company must increase its income by the product of that excess and its current investment yield on assets held in the United States. For purposes of this calculation, a company's surplus held in the United States is the excess of its assets held in this country over its total insurance liabilities on United States business. Some foreign life insurance companies may have been seeking to avoid the effect of the provision by incurring large, short-term noninsurance liabilities at the end of the year. This practice (e.g., borrowing a large sum for a short period such as a week) could have the effect of increasing assets by the borrowed amount without any corresponding increase in insurance liabilities. In addition, a company may seek to avoid the provision by holding assets in the United States that have a low current investment yield and substantial unrealized appreciation, which has the two-fold effect of increasing United States assets (which, in the case of real property and stock, are valued at market value), and decreasing the current investment yield on those assets. Possible Proposal The imputation rule could be clarified to provide that it take into account the excess of a company's United States assets over its total United States liabilities, not just its insurance liabilities, and that unrealized appreciation in the assets is not taken into account. In addition, the investment yield taken into account could be the investment yield on all assets of the entire company, so that the selection of low-yielding assets to hold in the United States would be irrelevant. Alternatively, the investment yield on United States assets could take into account in determining the amount of any unrealized appreciation in the assets during the year. Arguments for the proposal Pros and Cons 1. The proposal eliminates possible loopholes that would make the imputation provision avoidable at will. 2. The proposal cuts back an unintended and unfair competitive advantage that foreign life insurance companies insuring United States risks have over purely domestic companies insuring such risks. Arguments against the proposal 1. The proposal could discourage foreign life insurance companies from insuring and reinsuring United States risks and, thus, could make life insurance scarcer and more expensive in the United States. 2. The proposal could prompt foreign jurisdictions to take retaliatory measures against United States insurers operating abroad, and, thus, could hurt United States international competitiveness as well as disrupting international insurance and reinsurance markets. e. Minimum tax treatment of mutual life insurance companies Present Law Among the preference items taken into account in computing the corporate alternative minimum tax (as amended by the 1986 Act) is the amount determined by comparing the adjusted net book income of the taxpayer with its unadjusted alternative minimum taxable income (the "book income" preference). In general, the book income used in computing the adjusted net book income of a corporate taxpayer is the net income or loss set forth on the taxpayer's applicable financial statement, with certain conforming adjustments. The applicable financial statement is the statement it provides for regulatory or credit purposes, for the purpose of reporting to shareholders or other owners, or for other substantial nontax purposes. In the case of a corporation that has more than one financial statement, rules of priority are provided for the determination of which statement is to be considered as the applicable financial statement for the purpose of determining net book income. In the case of a mutual insurance company subject to regulation under State insurance laws, the applicable financial statement is likely to be the statement that the company files with the State insurance regulatory authority, as a mutual company does not have shareholders and consequently does not provide a financial statement for shareholders. Stock life insurance companies, on the other hand, generally do report to shareholders, and consequently the applicable financial statement for such companies is likely to be the statement provided to their shareholders. For tax purposes, but not for financial reporting purposes, mutual companies are required to include in income the differential earnings amount, an amount intended to take account of the deductibility to mutual companies of policyholder dividends. This addition to Federal taxable income is not normally permitted to be included in the amount reported by a mutual insurance company on its applicable financial statement. Thus, generally, under the book income preference, mutual companies are likely to have a smaller difference between book income and alternative minimum taxable income than are stock companies, and consequently are less likely than stock companies to incur tax liability under the corporate alternative minimum tax. Possible Proposal An adjustment could be added to the calculation of book income of mutual life insurance companies to include the differential earnings amount in their book income. Argument for the proposal Pros and Cons 1. The proposal would eliminate the unfair advantage of mutual life insurance companies over stock life insurance companies under the book income provision, and would prevent the mutual companies from, in effect, enjoying a reduction in the book income prefer ence. Argument against the proposal 1. The intention of the book income provision is to take into account a corporation's income for financial reporting purposes, without any adjustments; such adjustments are both unnecessary and complex. |