Federal Tax Proposal Could Raise Insurance Costs In Earthquake Country - Pacific Research Institute

Federal Tax Proposal Could Raise Insurance Costs In Earthquake Country


California is called earthquake country for good reason.

There are nearly 2,000 known fault lines crisscrossing the state, and scientists continue to discover new fault lines all the time. Nearly every Californian lives within 30 miles of an active fault line.

The U.S. Geological Survey recently released a study identifying a section of the San Andreas Fault along I-5 near the Grapevine as long overdue for a major quake. A major quake near any of California’s major population centers could cause tens of billions of dollars in property damage, destroy major infrastructure and put far too many Californians in harm’s way.

Earthquakes are not the only natural disasters that Californians regularly face. Cal Fire counted more than 5,700 wildfires in 2016, burning over 147,000 acres. State officials are still calculating the cumulative damage from this winter’s major storms, including the Oroville Dam emergency.

Living in a state that is prone to so many different natural disasters, Californians rely on relatively affordable property insurance to protect themselves and their homes against the next “big one.”

Unfortunately, a tax proposal that is on the table in Congress could significantly increase insurance costs for all Californians.

A new joint study released by the R Street Institute and the Pacific Research Institute found that Californians could see $1.91 billion in higher property-casualty insurance premiums over the next decade if Congress enacts the so-called “border-adjustment tax” or BAT.

Right now, Californians have affordable property insurance rates — despite the constant risk of natural disasters — because insurers can spread the risk.

They do so by buying international “reinsurance.” Just like you would diversify your investment portfolio to guard against risk and not have all your eggs in one basket, so do U.S. insurers. Insurers buy “reinsurance” from global firms that themselves spread their risk with pooled policies from around the world.

Through reinsurance, consumers can be confident that their claims will be paid the next time a major fire, earthquake or flood strikes California.

The BAT being considered by Congress would effectively levy a tax on these international reinsurance costs because the BAT taxes imports, but not exports, and international reinsurance is an import.

Many countries exempt financial services like reinsurance from border taxes. But if Congress enacts a tax without such an exemption, the R Street-PRI study concludes that U.S. insurers would essentially not be able to use international reinsurance to spread their risk any longer — the tax costs would simply be too high. As a practical matter, all the risk then would then be concentrated in the United States rather than spread globally. This will make California’s insurance market less competitive.

The bottom line is that Californians would pay higher premiums if Congress takes away a vital tool that insurers use to spread risk and keep insurance costs affordable.

Whatever road Washington takes on tax reform, it must act carefully and avoid the unintended consequences of a proposal like a border-adjustment tax. Adopting tax reform that has the effect of increasing the insurance rates of all Californians, or worse, devastating our state’s insurance market, is the wrong approach.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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