Lurid Luring

So you’re a state, have a jobs issue and prefer companies with a green footprint. What to do? Over the years, we’ve been watching states and local communities make all kinds of offers to lure companies to shift their operations to their venues. Free or cheap land. Deferred, reduced or even waived property and state income taxes. Or you can throw regulations that were intended to protect consumers out the window, allow senior managers free reign to enhance their compensation packages and make life really pleasant if only they would move to the new state (or stay in the old state).

Creating jobs helps state and local candidates like no other. More jobs. More people earning money. More expenditures in local communities. Big, big benefits. But mostly for the companies involved, many of which are not creating new jobs for the country, but simply relocating where they occur. Some of these job wars even have some pretty nasty consequences not just for state taxation but for federal taxes as well.

Take the American life insurance industry. Some say the feds have lost as much as $100 billion in taxes from this sector over the past few years. “The insurers are taking advantage of fierce competition for their business among states, which have passed special laws that allow the companies to pull cash away from reserves they are required to keep to pay claims. The insurers use the money to pay for bonuses, shareholder dividends, acquisitions and other projects, and because of complicated accounting maneuvers, the money escapes federal taxation.

“The Transamerica Life Insurance Company used a state law in Iowa last year to reap $1.8 billion from its reserves while also avoiding an estimated $640 million in federal taxes, according to company documents. The deal was unusually large but otherwise followed the general industry trend.

“South Carolina, Arizona and Delaware are other states competing for these deals, hot on the heels of Vermont, which pioneered the idea many years ago. Hawaii is positioning itself as the venue of choice for fast-growing Pacific Rim insurers.

“But other states have refused to go along, and in New York, the state’s financial services superintendent is appealing to Washington to block the practice… The pre-eminent goal of insurance regulation, which is handled state by state, is making sure all insurers operate safely, keeping enough money on hand to pay claims promptly. But some states allow them to reduce sharply the amounts they must hold, well below the level set by law, through the complex deals.

“The deals are structured to let companies report their reserves as unchanged. This is where the tax savings comes in. By federal law, reductions in reserves are treated as taxable income. But because on paper it appears that the reserves have remained the same, the insurers do not pay the federal tax. The maneuvers are sometimes known as ‘shadow insurance.’” New York Times, December 12^th. Even the IRS has supported this twisting of the spirit and intention of our tax laws.

“Even better for insurers, they already receive a federal tax incentive when it comes to reserves. Because they are an ordinary business expense, reserves are tax-deductible — the higher the reserves, in general, the bigger the federal deduction. And from a savvy life insurer’s point of view, that is the beauty of these transactions: It can both avoid a tax and free up capital at the same time. So far, state regulators have no authority to enforce the federal tax laws. The I.R.S. does have that authority but cannot often see the tax maneuver because such deals are extremely complex and the details are often protected by state confidentiality laws.” NY Times.

What’s amazing about all this is that it takes legions of sophisticated tax lawyers and financial specialists to construct these complex formulas (and lobby state officials), way more than the assets the IRS has to deal with such issues – a matter compounded by Congress’ large cuts to the IRS budget which you have to believe is an attempt to perpetuate manifest unfairness. Institutionalized unfairness shifts the cost of running the country to everybody else. But because of the complexity, taxpayers just do not understand the sleight of hand involved.

I’m Peter Dekom, one tiny squeaky voice screaming to end this tilt that makes life for average Americans so much more difficult, but I’m trying!