Advocacy Update: November 9, 2007

U.S. House of Representatives Passes Year-End Tax Bill (H.R. 3996)—Bill Leaves Insurance Out of Mix; Patches AMT and Extends Expiring Tax Benefits

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The U. S. House of Representatives just passed its version of a year-end tax bill today, by a vote of 216 to 193. The bill, H.R.3996, is a spin-off “daughter” bill largely taken from H.R.3970, the bill tax writing members of Congress call the “Mother of All Tax Reform Bills.” Neither this tax bill, H.R.3996, nor the “Mother Bill,” H.R.3970, change the tax rules governing life and health insurance, or the tax rules governing employer-provided benefits.

As approved by the House, H.R.3996 is revenue-neutral. Its $75 billion in relief from the individual Alternative Minimum Tax (AMT) and extending 32 other tax credits and deductions that are scheduled to expire on January 1, 2008 is fully offset by other tax increases.

H.R.3996 as approved today by the House would extend two provisions of interest to life insurance and financial advisors. First, it would continue authority for IRA owners to make up to $100,000 worth of contributions directly from their IRAs to a charity, without triggering tax liability. Second, it would continue the $100/day penalty tax on group health insurance plans that fail to comply with the mental health parity rules.

To become law, this bill has to be approved by the Senate and signed by the President--both iffy at this point. The Senate Finance Committee has yet to write its version of a year-end tax bill. Plus, there remains raging controversy over whether to waive "pay-go" rules that require the revenue-losing provisions in H.R.3996 to be offset. Most Congressional Republicans, some Democrats and the President would prefer to patch the AMT without offsetting its $50 billion cost. Most Congressional Democrats and a few Republicans think it is crucial to comply with pay-go rules. It remains unclear currently which way this debate will go.

WHAT THIS MEANS to NAIFA MEMBERS: The total cost of H.R 3996 is about $75 billion in lost tax revenue over 10 years. Under the pay-go rules Congress adopted last January, that $75 billion has to be offset by other changes in the tax code. In other words, the tax relief this bill gives to 20 million or so taxpayers who would otherwise be hit by the AMT (and the tax relief that would come from extending the 32 expiring tax provisions) is made possible by INCREASING other taxes. The GOOD NEWS IS THAT NONE OF THE TAX INCREASES IN H.R.3996 IMPACT THE INSURANCE PRODUCTS OR SERVICES PROVIDED BY NAIFA MEMBERS TO THEIR CLIENTS.

NAIFA ACTION: Over the years, and with strong NAIFA support, Congress has granted important tax advantages to people and businesses that use life insurance, annuities, disability income, medical insurance, LTCi, and retirement plans to transfer financial risk from themselves to the insurance industry. Since Congress adopted its “pay-go” budget rules last January, NAIFA has engaged in an intense campaign to educate members of Congress on the value that these products and services play in keeping Americans finically secure. For example, on September 11, 2007, 1,200 NAIFA members held over 400 meetings with members of Congress and staff on this subject. At least for now, these efforts have helped Congress to see the wisdom of not cutting back on insurance tax benefits in order to “pay for” other tax benefits.

FURTHER BACKGROUND: The main feature of the bill passed today, the AMT patch, will prevent about 20 million taxpayers from having to pay AMT on their 2007 income. Without this “patch,” some taxpayers who use many tax deductions such as the child tax credit or the state income tax deduction and who earned as little as $40,000 in 2007 would be hit by the AMT.

The AMT was first enacted in 1969 to make sure that 155 “millionaires who paid no tax” would pay at least a minimum amount. However, when it enacted the AMT in 1969, Congress failed to index the threshold amount of income that triggers the AMT, and thus as inflation has increased compensation, more and more middle American taxpayers hit the threshold and have to contend with the AMT.

H.R.3996 also extends 32 tax provisions that are set to expire at the end of 2007. These include such high-profile provisions as the research and development tax credit, and the deduction for state sales taxes. This is the section of the bill that extends the IRA charitable contribution provision and the mental health parity excise tax.

For a further explanation of this bill go to www.naifa.org/advocacy/frontline/2007/20071101_nfl_1.html.