The banking and insurance industries constantly battle each other over political issues, but they found a common enemy last week: President Clinton.
The administration's 1999 budget proposal would tax variable annuities whenever an investor changes the mix of funds in the account. The measure would raise nearly $1 billion over five years.
The President also would eliminate favorable tax treatment for banks that buy life insurance policies on their senior executives. It would raise $2.2 billion over five years.
"We are absolutely, unequivocally opposed to these tax increases on insurance products that are so needed by the retirement system," said Douglas P. Bates, director of federal relations for the American Council of Life Insurance.
Under the administration's annuities proposal, policyholders would be taxed at ordinary income tax rates on their gains when swapping a fixed annuity for a variable annuity or vice versa. They would also be taxed when moving money between mutual fund options within a variable annuity.
Currently, annuity owners make these exchanges and reallocations of money tax-free. They pay taxes when they start receiving their annuity payments, which is usually after age 59 and a half.
Defending its proposal, the administration argues that investors are usually taxed on the sale or exchange of assets. Further, variable annuities have evolved into more complex investment vehicles that should be subject to more taxes.
Opponents counter that the purpose of deferring taxes on these annuity products is to encourage savings for retirement. Michael D. White, a bank insurance consultant in Radnor, Pa., likens the current tax breaks on annuities to mortgage deductions that encourage homeownership.
"Banks are obviously selling a lot of annuities," said James T. McIntyre, the Washington counsel for the Association of Banks in Insurance. "If this tax treatment is going to make them less attractive investments, then it is going to have an impact on bank sales of annuities."
Banks and insurance companies already have at least one powerful supporter on Capitol Hill.
Senate Banking Committee Chairman Alfonse M. D'Amato last week promised to lead a floor fight against the proposal.
It is "simply wrong" from a policy standpoint to tax annuities as the president has proposed, the New York Republican told the Council of Insurance Agents and Brokers. And the revenue it would raise is minor, he added.
"This really comes out of the pockets of working, middle-class families," he said. "It discourages and flies in the face of what we should be about-that is to encourage people to invest and to save."
Banks may take an even harder hit on the corporate-owned life insurance proposal because they are a major buyer of these policies. Banks purchase the policies as investments and use the earnings to reimburse themselves for life insurance and other benefit payments to senior executives and directors.
Currently, banks may deduct the interest on these policies. The President's proposal would scale back the deductions except for ones that cover shareholders who own 20% of the bank.
The Clinton administration should expect a tough fight from the banking and insurance industries over both proposals. "They have done a fairly good job of nipping these things in the bud historically," said Andrew W. Singer, managing director of the Bank Insurance Market Research Group in Mamaroneck, N.Y.
But the administration may guard these revenues closely, particularly if the revenue expected from the proposed settlement with the tobacco industry-which has not been approved by Congress-falls through.
