RALEIGH — A proposed federal border-adjustment tax would cost North Carolina consumers an additional $800 million in higher property-casualty insurance premiums over the next decade. That’s the bottom-line conclusion from a new report issued by the John Locke Foundation and the Washington, D.C.-based R Street Institute.
The tax would hit this state particularly hard based on two factors. First, North Carolina faces unusually high risks of natural catastrophe. Second, its insurance regulation structure makes North Carolina especially dependent on the foreign reinsurance that would be affected by the new border-adjustment tax, or BAT.
“For consumers in North Carolina and all across the country, the real effects of applying a BAT to insurance and reinsurance … would be to make it harder and costlier for property owners to buy home insurance, for employers to buy workers’ compensation, for factories and industrial plants to insure their machinery, and for contractors to get the terrorism insurance they need to erect new buildings,” according to the report.
“With estimates from retailers that a BAT could cost the average North Carolina family an additional $1,700 per year in higher prices for everyday goods, this latest report offers even more evidence that Washington policymakers should think twice before enacting a border-adjustment tax,” said JLF President and CEO Kory Swanson.
The BAT would eliminate taxes on foreign income earned by U.S. companies. At the same time, it would remove U.S. firms’ ability to write off the costs of goods and services purchased from abroad.
Without an exemption for financial services, this means that insurers would no longer be able to deduct the costs of foreign reinsurance as a legitimate business expense, according to the report. Yet reinsurance is the “primary tool” insurers use to manage their exposure to “catastrophically large” risks.
States like North Carolina that have “significant exposure” to natural catastrophes would face a larger impact than other states, according to the report. North Carolina accounted for $972 million of catastrophe losses in 2016, “the fourth-highest tally of any state.”
Mother Nature isn’t the only factor. “Exacerbating the problems that stem from North Carolina’s exposure to coastal storms and other natural perils is [the fact] that the state employs an antiquated ‘rate bureau’ system of property and casualty insurance regulation,” the report stated.
“Because insurers aren’t free to craft their own products tailored to individual risk profiles, a much-larger-than-usual percentage of North Carolina home and auto policyholders find they can only obtain coverage from state-backed ‘residual’ market entities,” according to the report.
North Carolina’s residual plans — known as the Beach Plan and the FAIR Plan — have grown in recent years as other states have seen their comparable plans shrink. The Beach Plan and FAIR Plan now combine to represent nearly one in 10 residential property insurance policies in the state, according to the report.
“Swings in the price and availability of reinsurance thus play an outsized role in determining whether North Carolina consumers have access to affordable property insurance or, in some cases, whether coverage will be available at all,” the report explained.
“Erecting barriers to the free flow of reinsurance across national borders — as would be the case under a border-adjustment tax — inevitably would result in making primary insurance products more expensive or, in some cases, completely unavailable.”
Report authors used commercial catastrophe models to calculate that North Carolina has expected annual losses from catastrophes of $1.14 billion. That’s more than 2 percent of the global figure of $50.4 billion. Based on related calculations, annual premiums in North Carolina would have to increase by $80 million to account for a BAT.
“Since this additional annual cost to North Carolina consumers would persist into the foreseeable future, a multiyear figure adds appropriate perspective,” according to the report. “Over the next decade, ignoring inflation, this analysis estimates $800 million of additional expense for North Carolina consumers.”
The report sends a warning to lawmakers on Capitol Hill. “With time to ponder the consequences of what would be radical changes to the structure of the U.S. tax code, Congress should bear in mind how the border-adjustment tax proposal would affect insurance and reinsurance markets across the country and around the world.”
“Given North Carolina’s particular exposure to catastrophes and the need for reinsurance, the border-adjustment tax represents a bad deal for insurance policyholders and the state,” Swanson said.
The John Locke Foundation and R Street Institute’s report, “Impact of a Border-Adjustment Tax on the North Carolina Insurance Market,” is available at the JLF website. For more information, please contact Mitch Kokai at (919) 306-8736 or [email protected]