This commentary originally appeared in The Monitor on June 4, 2017.
As a Texas consumer, you may not sit around talking about border adjustment taxes. However, an implementation of that policy could affect your pocketbook, especially when it comes to Texas’ already high insurance rates.
Most of the conversation around the proposed border adjustment tax (BAT) — as seen in the May 23 hearing held by the U.S. House of Representatives Ways and Means Committee — centers around the effect it will have on American exporters. However, few people are talking about the effect it will have on American consumers.
A new report from the Texas Public Policy Foundation and the R Street Institute helps illustrate how BAT may negatively affect consumers, especially in Texas. According to the study, if financial services are not exempted, Texas consumers would pay at least $3.39 billion in higher property-casualty insurance premiums over the next decade under the BAT. Here’s why:
Most Texans own multiple forms of insurance. Texas drivers are mandated by state law to have insurance, and it would be foolhardy to purchase a house without getting it insured. Insurance is everywhere and the companies which provide it are a key part of the economy.
These insurance providers need to be insured as well. A catastrophic event such as a tornado, hailstorm, or hurricane can cause insurance claims to skyrocket and cost insurers millions of dollars literally overnight. This is where reinsurance enters the picture. Reinsurance firms insure insurance companies against catastrophic events. They can afford to do this by spreading out the risk they take on, insuring companies against uncorrelated events such as cyberterrorism in Qatar, floods in Uzbekistan, and tornados in Texas. By covering such vast and unrelated spectrums of risks around the globe, reinsurance companies can be fairly certain that they will not be hit with multiple catastrophe claims in the same year.
The fact that reinsurance companies are global almost by definition makes them highly susceptible to a border adjustment tax. If applied to reinsurance, the tax would “eliminate taxes on foreign income earned by U.S. companies, while simultaneously removing U.S. firms’ ability to write off the costs of goods and services sourced from abroad.” Currently, domestic insurers can write off the cost of purchasing reinsurance as another legitimate business expense, even if that reinsurance is sourced from overseas (as is typical.) Under a BAT this may not be the case, and reinsurance purchased from foreign sources would be subject to the tax.
Forcing U.S. insurance companies to pay the BAT on reinsurance would significantly raise the price of using international reinsurance for U.S. insurers. This would likely result in the majority of American insurers withdrawing from the global market and having to either pay more to American reinsurers or charge higher premiums to consumers to cover their expected losses without the benefit of the global reinsurance market. This withdraw from the international reinsurance market and its consequences could lead to a sharp increase in the price of insurance in Texas, an increase that would be higher than that experienced anywhere else in America. This higher projected price increase in Texas is due to the fact that Texas experiences the most natural catastrophes a year out of the American states. In 2016 Texas accounted for $7.96 billion of catastrophe losses, the highest amount of any state.
Considering the frequency of catastrophic events in Texas, it is unsurprising that the Lone Star State already has some of the highest rates for property insurance in the United States. In 2013 — the last year for which data is available — Texas had the third-highest rates for homeowners insurance in the country. These already high premium rates would only increase under the proposed tax reform plan, costing consumers literally billions over the next decade.
Congress should consider all of the consequences before enacting a border adjustment tax, particular if it taxes reinsurance. The cost of such a tax could be significant for Texas, for Texans, and for the national economy as a whole.