D.C. Economy Booster: Bermuda on the Potomac?
Last week, at a forum in Adams Morgan, Council chairman Vincent Gray was asked—as he often is—how he would solve unemployment in the District. On top of the usual answers about job training and construction projects, Gray had one most audience members hadn’t heard before: Making D.C. a tax shelter for insurance companies.
Here’s what he meant. Currently, about $60 billion of American insurance companies’ reserves for natural disasters is sitting in banks in Bermuda and the Cayman Islands—in the United States, federal law holds that it must be taxed as income, so companies save a bundle by keeping it offshore (and meanwhile, Bermuda has pretty near the highest per capita GDP in the world). If Congress created similar tax conditions for insurance companies in the District, some of those funds would certainly come here, creating a significant number of new jobs.
Gray didn’t actually come up with the idea. That honor goes to Lawrence Mirel, now an attorney with Wiley Rein LLP, who thought of it while serving as insurance commissioner in the Williams administration. Mirel started shopping around the proposal around in earnest about a year ago, garnering interest from Del. Eleanor Holmes Norton as well as Mayor Adrian Fenty, and the office of the Chief Financial Officer has even done preliminary studies.
“The more I got into it, the more intriguing it became,” Mirel tells Housing Complex. “So far, nobody has said no.”
The idea should gain traction in Congress, Mirel explains, because lawmakers are starting to worry about hurricane season—and the fact that all of America’s insurance reserves are sitting in another country not subject to U.S. regulation. The District is a perfect place to relocate them, since Congress could only create such favorable tax conditions in a jurisdiction where it has total oversight. (In the 1970s, the Feds did a similar favor for Puerto Rico, making the protectorate a tax haven for pharmaceutical companies.)
Besides, Mirel says, it would be only fitting to bring more of the U.S.’ financial industry to Washington.
“We’re the only national capital in the world that isn’t a financial center,” he notes. “I’ve never understood why London is still the dominant financial capital in the world. That was last century!”
Photo by flickr user itucker.
Here is Mirel's more detailed description of the idea:
A PROPOSAL TO AMEND THE U.S. TAX CODE TO EXCLUDE FROM TAXABLE INCOME CATASTROPHE RESERVES
MAINTAINED BY INSURANCE COMPANIES DOMICILED IN THE DISTRICT OF COLUMBIA
Summary of Proposal:
It is proposed that Congress amend the U.S. tax code to exempt from federal taxation money that is set aside in designated “catastrophe reserve funds” by qualified insurance companies located in the District of Columbia. A “qualified insurer” would be any insurance company that is domiciled in D.C. and meets the standards for doing business as an insurer in that jurisdiction.
The proposal would allow the U.S. to compete with off-shore jurisdictions to keep insurance company catastrophe reserves in the U.S., by providing tax incentives for such funds to be maintained in the District of Columbia, where Congress has exclusive legislative authority. These reserves will provide additional economic security for U.S. jurisdictions that are subject to natural catastrophes, as well as providing revenue and jobs to the District of Columbia and the surrounding region.
Details of the proposed legislation
• Qualified insurers would be entitled to (i) a deduction for contributions to catastrophic loss reserves, and (ii) an exemption from gross income for income, gain, and other investment earnings on catastrophic reserve funds. Qualified insurers could engage in any lawful and authorized insurance business and would otherwise be subject to the same Federal income tax as other domestic property and casualty insurance companies. That is, after the deduction for contributions to their catastrophic reserves, they would be taxable on their investment earnings other than investment earnings on catastrophic reserve funds.
• Qualified insurers could underwrite all lines of property and casualty risks, either directly or indirectly through reinsurance. The proposed Federal tax benefits to qualified insurers, however, would apply only to contributions to catastrophic reserves and the investment earnings on those reserves.
• Eligible catastrophes would include windstorms (hurricanes and tornados), earthquakes, fire, floods, and other named perils. The bill might also be written to include terrorism risks that are not covered by TRIA.
• The proposal would create a backstop of private, insurance company funds held in reserve against future natural catastrophic losses, instead of putting the U.S. taxpayer on the hook for potentially vast sums through some kind of Federal Government backstop as was done with terrorism risk through the Terrorism Risk Insurance Act. Since little of this money is currently taxable, because it is held in non-U.S. jurisdictions where it is not taxed, the loss to the U.S. Treasury of allowing the funds to be kept tax free in the District of Columbia would be negligible.
• Congress has direct legislative authority over the District of Columbia. The proposal would avoid the need to deal with the separate laws and authority of state insurance regulators. It would also provide the District of Columbia with a source of earned revenue, through jobs and local taxes, thereby reducing or eliminating the need for a federal payment to make up for the District’s constricted tax base due to its limited land area and inability to tax the Federal Government, international activities and the earnings of non-residents.