For lobbyists from the financial industry, the moral in President Bush's tax proposals is: Be careful what you wish for. For years, they've argued that Washington needs to goose the nation's pathetic rate of savings. But faced with a wealth of potential investment tax breaks, banks, brokers, and insurers are looking more closely at how they would be affected--and they don't always like what they see. Some are even considering lobbying against the President's plan if it isn't made more palatable.
Banks, for example, applaud tax-free savings accounts, which would boost deposits by letting individuals set aside up to $15,000 a year with no tax on earnings. But banks balk at the plan to exempt stock dividends from income taxes, fearing the $385 billion break will divert savings to brokerage firms. Wall Street agrees: The Securities Industry Assn. has already shepherded 14,000 letters supporting the dividend plan to Capitol Hill.
The hardest-hit financial sector, however, is life insurance--and insurers have wasted no time in giving the Administration an earful. When Commerce Secretary Donald L. Evans invited a half-dozen insurance CEOs to lunch to discuss the President's economic plan, Frank Keating, the former GOP governor of Oklahoma who now heads the American Council of Life Insurers, told Evans that the plan leaves insurers out in the cold. Keating, who was on Bush's short list of Veep candidates, is working GOP connections to warn officials--including Treasury Secretary John W. Snow, White House economist R. Glenn Hubbard, and Bush political strategist Karl Rove--that the plan risks severe damage to the industry's $190 billion-a-year annuity business.
Tax-deferred earnings have been the No. 1 selling point for annuities, insurance contracts that pay income over a person's lifetime. Variable annuities, which combine insurance's postponed taxes with mutual funds' investment options, would especially suffer if cheaper alternatives, like bank or brokerage accounts, offer earnings that are totally tax-free. And the dividend plan contains no tax break for annuity owners, while letting mutual funds pass tax-free dividends on to investors. "We support reducing taxes on investment," says Keating, "but annuities have to have fair and equal treatment."
Insurers are lobbying for two adjustments. One would let annuity holders withdraw dividends paid into their account tax-free. The second would treat annuity withdrawals as capital gains, with lower tax rates. "We employ lots of people, we pay lots of taxes, and we hold billions of dollars for investors," says Lorry J. Stensrud, CEO of Lincoln Retirement, the annuity arm of Philadelphia-based Lincoln National Corp. "We're looking for a little parity."
So far, the insurance lobby is treading lightly. Like other financial lobbies, they figure Bush's tax-free savings accounts are probably DOA. The brainchild of departed Treasury Secretary Paul H. O'Neill, the tax-free accounts have few gung-ho advocates in the Administration and even fewer on Capitol Hill, where lawmakers are pushing less ambitious retirement reforms.
But the dividend proposal has far better odds of passing, albeit in a reduced form. Insurers don't want to launch a full-bore attack on a President they generally support. So their most potent lobbying force--a grassroots network of politically active insurance agents--hasn't been called into action. But the threat to annuities "is serious enough," Keating warns, "that we're glad to have that arrow in our quiver." You might call it an insurance policy. A family feud has broken out at the Federal Communications Commission between two Republicans, Chairman Michael K. Powell and Commissioner Kevin J. Martin. At a Feb. 20 meeting, Powell was expected to try whittling down rules that require the Baby Bells to lease their local networks at discount prices to rivals. Martin is siding with the agency's two Democrats in hopes of passing a less drastic plan that lets states decide whether to preserve rules meant to stoke competition in the local-phone business.
How can Martin, 36, so cheekily take on a rising GOP star and the son of Secretary of State Colin Powell? Martin has friends in high places, too. His wife, Catherine, is Dick Cheney's spokeswoman, and law school pal Ken Mehlman is White House political director. Martin and Mehlman worked closely during the Florida recount in 2000. Martin also has the support of conservatives who have the President's ear, such as Grover Norquist of Americans for Tax Reform and the National Federation of Independent Business. Powell's plan, they worry, will lead to higher prices for consumers and small biz.
So does Martin have the tacit support of a White House fearful of higher phone prices come 2004? Martin isn't saying, and a Bush spokesperson denies any meddling. But Norquist and the NFIB often act in concert with the White House on tax cuts and deregulatory proposals. It's not every day that an FCC commissioner takes on a chairman of his own party, but this one has his back well covered.