- Increase to corporation taxes could increase value of captive strategies
- Uncertainty over what comes after Tax Cuts and Jobs Act which expires in 2025
- Tax-exempt municipal bonds could be more viable investment strategy post-election
As the United States presidential election approaches on Tuesday 5 November, captive owners and consultants should be mindful of what implications different outcomes would have for the industry and captive strategies.
The US election is currently balanced on a knife’s edge, with neither former President Donald Trump nor Vice President Kamala Harris able to maintain a sizeable lead in the polls.
Understandably, captive insurance is not a talking point in the US election but various policies, particularly regarding cuts and other financial measures, will have direct and indirect impacts.
With the potential ending of Tax Cuts and Jobs Act provisions, introduced in 2018, there is likely to be implications for captive investment strategies with tax-exempt municipal bonds potentially becoming a popular investment again.
“While the tax agenda differs – some might say significantly – between the two parties, it does not include specific policies for captive insurance companies,” Mikhail Raybshteyn, partner and Americas captive insurance services co-leader at EY, told Captive Intelligence.
“However, there are tangential matters that will impact the insurance industry, such as tax rates or certain international tax regulations affecting insurance companies regarding deductions or interest.
“These are general tax code issues that will affect insurance companies, and by extension, captives, as those are generally treated as corporations for US tax purposes.”
Raybshteyn said that if the Republicans come out on top, we can likely expect a status quo approach on a number of items or some slight tweaks to tax rates.
“If Democrats take control, we may see changes in the tax code, such as rate changes or other adjustments,” he added.
Harris has suggested in the past that she plans to raise corporate tax rates to 28%, which would potentially make captives more valuable from a tax perspective.
“At a 28% rate, if a captive accurately calculates the loss reserve, the accelerated deduction becomes more significant than at the current 21%,” said Daniel Kusaila, partner at Crowe.
The Harris campaign spokesperson James Singer said that the move would be part of “a fiscally responsible way to put money back in the pockets of working people and ensure billionaires and big corporations pay their fair share.”
If Trump were to win, he might attempt to reduce the corporate tax rate which is an important consideration for any US tax strategy.
“In my opinion, raising corporate rates would be bad overall,” Kusaila said.
“On the other hand, if the corporate rate is lowered – and I’m not sure, but I’ve heard some talk about this – then we might see more foreign investment in the US, including more foreign captives coming into the US”.
Raybshteyn said that most clients are interested in the potential impact of tax rate changes, as this will influence decisions related to cash usage and other financial considerations for captives.
“Unfortunately, much like our clients, we do not have a crystal ball,” he added.
“Everyone is making certain educated guesses and prognosis, but as we have seen over the past few years, the political landscape has been rather unpredictable, and the outcome of the upcoming election is still uncertain.”
Jack Meskunas, executive director for investments at Oppenheimer & Co, believes that neither of the presidential candidates appears to be particularly business friendly.
“On one hand, they have both promised significant tax cuts,” he said. “On the other hand, they have discussed increased regulation, antitrust actions, and higher corporate taxes.”
Meskunas believes that no matter the outcome of the election, the US could face a more challenging business environment, which is likely to impact parent companies more directly than captives.
“However, there will ultimately be a knock-on effect that could affect captives as well.”
Tax Cuts and Jobs Act
Captive owners should also be aware that Tax Cuts and Jobs Act provisions introduced in 2018 will be expiring in 2025, with the two parties expected to take different approaches going forward.
The Tax Cuts and Jobs Act provisions law enacted by President Trump reduced the rate of corporate tax from 35% and created a single flat corporate tax rate of 21%.
“Some companies are concerned about expiring provisions from the Tax Cuts and Jobs Act, and these are natural questions to ask,” Raybshteyn said.
“The issue now is that 2025, the sunset year, is fast approaching. Previously, companies thought of it as far off, but now they must face the reality of expiring provisions and decide what actions to take if they do expire.
“These concerns are top-of-mind for many clients.”
Wade Meadows, regional managing director and head of insurance and specialised industries at PNC Institutional Asset Management, said one party is likely to reinstate the provisions, while the other is less clear but is signalling increases.
“We are proactively preparing for these potential changes by having conversations now, so we are ready once the path becomes clearer,” he said.
Meadows said the Tax Cuts and Jobs Act ties into a broader diversification discussion, especially regarding insurance asset allocation.
“Before the 2017 tax reform, tax-exempt municipal bonds were a major part of fixed income portfolios, including captives.”
“Since then, their appeal has diminished, and we need to consider how to adjust our strategies accordingly.”
Because the Tax Cuts and Jobs Act lowered the rate of corporate tax, it made tax-exempt municipal bonds less attractive investments.
Matthew Sullivan, vice president and senior investment advisor at PNC Insurance Solutions Group, said he has been discussing tax-exempt municipal bonds with clients more frequently in light of potential changes to the tax code following the election.
“If the Democrats were to win the election, corporate tax rates may increase from the current 21% tax rate put in place during the Trump administration Trump’s tax cuts might roll back, which would bring tax-exempt municipal bonds back into focus,” he said.
Sullivan added that since tax cuts were implemented, tax-exempt municipal bonds have been less appealing, but they could become significant again if the tax landscape changes.
“We want to ensure our clients are prepared for any potential outcome,” he said. “This is not about making a political statement; it’s about being ready for any scenario.”