ACLI Update: Administration’s FY2023 Budget Summary of Tax Proposals of Interest to Life Insurers

By Mandana Parsazad and Regina Rose

TAXING TIMES, June 2022

The president’s Fiscal Year 2023 Budget proposal was released March 28, 2022. The Department of the Treasury also released the General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (the “Greenbook”). The Greenbook generally lays out the president’s plans for tax increases the administration would like to see proposed and enacted into law. While many (and in some years, most) of these provisions will not be included in current legislation, these proposals will be revisited year after year as future congresses look for ways to raise revenue to pay for spending priorities.

As a baseline, the Greenbook tax proposals assume that the Build Back Better Act (BBBA) has already been enacted. This assumption lowers the overall cost of the proposals being offered as part of the Greenbook. In the December 2021 ACLI Update Column in TAXING TIMES, we highlighted for you some of the pertinent proposals for life insurers that were included in the House-passed BBBA legislation.

It is unlikely that the BBBA that passed the House on Nov. 19, 2021 will move through the Senate. In fact, the chances are declining in this election year that portions of the BBBA will be enacted this year. While Senate leadership continues to indicate that discussions are taking place behind the scenes on passing something using reconciliation procedures (requiring only a majority vote in the Senate) prior to Sept. 30, time is running out to debate what should or should not be included in a package.

With the corporate and individual rate increases not part of the BBBA in order to meet Senator Sinema’s demands, the Biden administration Greenbook seeks to restore those increases in addition to adding other new taxes. For life insurers, there are some specific items of concern, including a corporate tax rate increase to 28 percent, a COLI interest disallowance provision (included previously in President Obama’s budget proposals), a minimum tax on certain wealthy individuals which would tax appreciation in assets (including life insurance and annuities), and a tax on certain fixed indemnity policy payments.

Many of the proposals are centered around issues for which ACLI and member companies have been preparing many years, including the administration’s newest minimum tax on the wealthiest taxpayers. ACLI and its members continue to keep a watchful eye on issues from BBBA which affect life insurers, such as a corporate alternative minimum tax based on book income, in the event legislation starts to move in the Senate, while at the same time analyzing many of the new proposals being offered.

We have briefly summarized the items mentioned above and a few other items of interest to life insurers that were included in this year’s Greenbook. All revenue estimates are for a 10-year period.

Company Tax Provisions

Raise the Corporate Income Tax Rate to 28 Percent
The proposal would increase the income tax rate for C corporations from 21 percent to 28 percent. The 28 percent corporate income tax rate will consequently increase the GILTI rate in tandem. Therefore, the new GILTI effective rate would be 20 percent, applied on a jurisdiction-by-jurisdiction basis. This proposal uniquely impacts life insurers since the change to the capitalization of policy acquisition costs and reserves in TCJA were specifically tied to the rate cut to 21 percent. ACLI has developed legislative proposals which would prevent further tax increases on those two life-insurer specific provisions in the event of a corporate rate increase. The proposal would be effective for taxable years beginning after Dec. 31, 2022 and raises $1.3T.

Adopt the Undertaxed Profits Rule (UTPR)
Repeal the BEAT and replace it with a UTPR that is consistent with the UTPR described in the Pillar Two OECD Model Rules. When another country or jurisdiction adopts a UTPR, the proposal also includes a domestic minimum top-up tax that would protect U.S. revenues from the imposition of UTPR by other countries. UTPR would apply only to multinational financial reporting groups that have global annual revenue of $850 million or more in at least two of the prior four years. Separately, the proposal would provide a mechanism to ensure U.S. taxpayers would continue to benefit from U.S. tax credits and other tax incentives that promote U.S. jobs and investment. The UTPR would not apply with respect to income subject to an income inclusion rule (IIR), including income that is subject to GILTI. The proposal to repeal the BEAT and replace it with the UTPR would be effective for taxable years beginning after Dec. 31, 2023 and raises $240B.

Expand Pro Rata Interest Expense Disallowance for Business-owned Life Insurance
Repeal the exception from the pro rata interest expense disallowance rule for contracts covering employees, officers or directors—including past and current employees, officers or directors. The exception for a policy covering a 20 percent owner of a business would remain. The Obama Administration’s Greenbook contained a similar proposal to disallow business interest expense for all but key persons of the business when the company owns COLI policies. The proposal would apply to contracts issued after Dec. 31, 2021 and raises $6.8B.

Correct Drafting Errors in the Taxation of Insurance Companies under the Tax Cuts and Jobs Act Of 2017 (TCJA)
Fix a drafting error related to policy acquisition costs from the TCJA. A statutory drafting error misidentified the appropriate language in the Internal Revenue Code (Code), so that only the percentage for annuity contracts could be implemented logically. The correction would change the capitalization rate of net premiums for group life insurance contracts from 2.05 percent to 2.45 percent and the capitalization rate for other non-annuity specified life and health contracts from 7.70 percent to 9.20 percent, as stipulated by TCJA. The proposal for policy acquisition cost changes would be effective as if it had been a part of the original TCJA and would be treated as a change of accounting method initiated by the taxpayer with the consent of the IRS for the taxable year beginning in 2022. A P&C item on loss reserve discounting for nonproportional reinsurance and international lines of business was also included in this category and the correction to the capitalization rates of policy acquisition costs and loss reserve discounting together raises $787M.

International Tax Provisions

Provide Tax Incentives for Locating Jobs and Business Activity in the United States and Remove Tax Deductions for Shipping Jobs Overseas
Create a new general business credit equal to 10 percent of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. The proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. The proposal would be effective for expenses paid or incurred after the date of enactment and has zero effect on revenue by raising $149 million by denying deductions for offshoring and increasing costs in the same amount for providing credits for onshoring.

Individual Tax Provisions

Increase the Top Marginal Income Tax Rate for High Earners
Increase the top marginal tax rate to 39.6 percent and lower the income brackets to which it applies by applying it to taxable income over $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals, $425,000 for head of household filers, and $225,000 for married individuals filing a separate return. By comparison, the current 37 percent rate bracket starts at $528,600 for single individuals and at $628,300 for married individuals filing jointly, so the proposal sweeps a significantly larger part of the population into higher rate brackets. After 2023, the thresholds would be indexed for inflation using the C-CPI-U, which is used for all current thresholds in the tax rate tables. The proposal would be effective for taxable years beginning after Dec. 31, 2022 and raises $186.8B.

Tax Capital Income for High-income Earners at Ordinary Rates
Long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million would be taxed at ordinary rates, with 37 percent generally being the highest rate (or 40.8 percent including the net investment income tax). The proposal would only apply to the extent that the taxpayer’s taxable income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2023. The proposal would be effective for gain required to be recognized and for dividends received on or after the date of enactment and this item, along with the below item, raises $174.5B.

Treat Transfers of Appreciated Property by Gift or on Death as Realization Events
The donor of a gift or a deceased owner of an appreciated asset would realize a capital gain at the time of the transfer for the excess of the asset’s fair market value on the date of the gift or on decedent’s date of death over the decedent’s basis in that asset. Gain on unrealized appreciation also would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years. This provision would apply to property not subject to a recognition event since Dec. 31, 1939, so that the first recognition event would be deemed to occur on Dec. 31, 2030.

Transfers to a U.S. spouse or to charity would carry over the basis of the donor or decedent. Capital gain would not be realized until the surviving spouse disposes of the asset or dies, and appreciated property transferred to charity would be exempt from capital gains tax. The proposal would allow a $5 million per-donor exclusion from recognition of other unrealized capital gains on property transferred by gift during life. Taxpayers could elect not to recognize unrealized appreciation of certain family-owned and -operated businesses until the interest in the business is sold or the business ceases to be family-owned and -operated.

The proposal would be effective for gains on property transferred by gift, and on property owned at death by decedents dying, after Dec. 31, 2022, and on certain property owned by trusts, partnerships, and other non-corporate entities on Jan. 1, 2023.

Impose a Minimum Income Tax on the Wealthiest Taxpayers
Impose a minimum tax of 20 percent on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) of an amount greater than $100 million. Taxpayers could choose to pay the first year of minimum tax liability in nine equal, annual installments. For subsequent years, taxpayers could choose to pay the minimum tax imposed for those years in five equal, annual installments.

A taxpayer’s minimum tax liability would equal 20 percent times the sum of taxable income and unrealized gains (including on ordinary assets) of the taxpayer, less the sum of the taxpayer’s unrefunded, uncredited prepayments and regular tax. Valuations of non-tradable assets would not be required annually and would instead increase by a floating annual return (the five-year Treasury rate plus two percentage points) in between valuations. The proposal would be effective for taxable years beginning after Dec. 31, 2022 and raises $360.8B.

Modify Income, Estate and Gift Tax Rules for Certain Grantor Trusts
For trusts that are not fully revocable by the deemed owner, the proposal would treat the transfer of an asset for consideration between a grantor trust and its deemed owner or any other person as one that is regarded for income tax purposes, which would result in the seller recognizing gain on any appreciation in the transferred asset and the basis of the transferred asset in the hands of the buyer being the value of the asset at the time of the transfer. Such regarded transfers would include sales as well as the satisfaction of an obligation (such as an annuity or unitrust payment) with appreciated property. However, securitization transactions would not be subject to this new provision. This proposal could, however, put transactions such as reinsurance transfers into trusts at risk of taxation when the use of a trust is involved. A gift would be deemed to occur for any unreimbursed amount of income tax paid by the grantor of a trust. The effective date of these provisions generally apply to transactions occurring after the date of enactment and raises, along with the some other items related to Grantor Retained Annity Trusts, $41.5B.

Clarify Tax Treatment of Fixed Indemnity Health Policies
Amend section 105(b) of the Code to clarify that the exclusion from gross income for payments received through an employer-provided accident or health plan applies only to the amount paid directly or indirectly for a specific medical expense. Any fixed payment (in the form of a direct payment, reimbursement, loan, or advance reimbursement) to an employee under a fixed indemnity arrangement that is paid without regard to the actual cost of the medical expenses the employee incurred would not be excluded from gross income and would be treated as wages subject to FICA and FUTA taxes. Individuals would still be able to exclude from gross income any fixed amounts paid through an accident or health policy purchased with after-tax dollars. The proposal would be effective for taxable years beginning after Dec. 31, 2022 and would have no revenue effect (according to the Greenbook).

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Mandana Parsazad is vice president, Taxes and Retirement Security, for the American Council of Life Insurers and may be reached at mandanaparsazad@acli.com.

Regina Rose is senior vice president, Taxes and Retirement Security, for the American Council of Life Insurers and may be reached at reginarose@acli.com.