Since the Kennedy administration, a key reason why Americans acceded to free trade agreements is that playing on a level playing field appealed to our sense of fair play. Whoever can make the best product and service will prevail. Winners don’t win because they game the system -- that’s not how the game is played here. That’s how the game is played in those sad, poor, third-world nations beset by corruption.

But there are cheaters in our reinsurance market due to an absurd loophole that foreign companies can use but that U.S.-based companies and U.S. individuals cannot. To dodge U.S. taxes, insurers effectively launder income generated in the United States to separate companies in their overseas tax havens. It’s a creative conspiracy which saves foreign owned insurance companies billions of dollars in taxes for sales they make in the United States, which has to be made up for by hardworking Americans. But it is all perfectly legal, and has been since tax reform in 1986. 

By dodging the taxes that U.S. companies have to pay, foreign insurers have a built-in competitive edge and huge leg up on raising capital. Tragically, this brazen favoritism creates an enormous incentive for foreign corporations to buy U.S. insurance companies. Since this loophole opened thirty years ago, the share of U.S.-based insurers in the U.S. insurance market has declined from 85 to 27 percent. Close to 75% of Fortune 500 companies have money in offshore tax havens according to a report by the US PIRG Education Fund and the Institute on Taxation and Economic Policy. Without a level playing field for all businesses in the U.S. reinsurance market, Americans are losing tax revenues, businesses, and jobs to other jurisdictions. 

Supporters of the status quo claim that closing the insurance tax haven loophole would be protectionist in general and might violate the General Agreement on Trade in Services specifically. Nonsense. If negotiators of trade deals intended for foreign corporations to legally launder money and dodge taxes at the expense of U.S. companies, the text of the trade deal surely would have said so. It does not. Closing this loophole isn't protectionist, since it doesn't favor U.S. companies over foreign ones, but merely restores similar treatment, consistent with the text and intent of U.S. tax treaties and trade obligations. 

Meanwhile, the loophole continues to incentivize an exodus of insurers to low or no-tax jurisdictions. Unlike in traditional reinsurance, there is little risk being shifted from domestic to foreign affiliates in these reinsurance transactions. In fact, every single acquisition of a U.S. insurer from 2014-2016 was by a foreign company, taking U.S. jobs along with them. Closing this loophole will take away an unjust incentive to relocate corporations outside the United States so we can start welcoming them back home.

Closing this tax loophole would level the playing field between U.S. and foreign-based insurers to the benefit of U.S. taxpayers and long-term job and wage growth in the United States. At a time when politicians are proposing raising the gas tax, reducing the amount of tax free savings, and removing other middle-class benefits, closing the loophole provides a more sensible way of restoring tax revenues to facilitate a compromise on Capitol Hill for comprehensive tax reform.  

Former treasury secretary Larry Summers once described corporate tax shelters may be “the most serious compliance issue threatening the American tax system." It isn’t hard to see why Mr. Summers feels this way: 60% of the top 15 reinsurers by premium are foreign owned, compared to just 15% in 1989; 35% of top 25 insurers in the U.S. primary commercial market are controlled by foreign-owned firms, up from just 6% in 1990.

It seems that after decades of neglect, this issue is finally getting the attention it richly deserves. In the initial tax reform bill that Congressman Brady drafted, Section 4303, which would close the loophole, would generate an estimated $154.4 billion over 10 years.

The insurance tax haven loophole must be closed as an element of fundamental fairness. Insurers should not be allowed to cheat on their taxes just because they are foreign-based.

Michael James Barton is the founder of the consulting firm, Hyatt Solutions. He previously served on the staff of the Senate Banking Committee.