CONFERENCE CALL: IT TOOK WORK TO STALL ANNUITY TAX HIKE

The Clinton administration’s proposals to raise taxes on variable annuities are unlikely to get anywhere this year, and the industry is crediting a broad-based lobbying effort and support from other financial services sectors.

“The annuity provisions are off the table for this year,” said Walter Welsh, vice president and director of government affairs for Hartford Life Inc. He and other participants in a panel discussion at the regulatory affairs conference of the National Association for Variable Annuities earlier this month described how they set up toll-free phone lines and encouraged employees and business partners to express their opposition in calls to key members of Congress.

One proposal would require variable annuity holders to pay tax on capital gains whenever they change subaccounts. Currently, annuity holders can accumulate earnings on a tax-deferred basis until they withdraw their funds at retirement, when their tax bracket is presumably lower.

A second proposal would reduce the tax-exempt portion of annuity contracts by the amount of the mortality and expense charges, except in cases where policyholders elect to annuitize at retirement.

Deduction limit for insurers

The administration also proposes to raise $8.5 billion between fiscal 1998 and fiscal 2008 by reducing the percentage of annuity contract reserves insurers are permitted to deduct. In all, the administration’s variable annuity proposals would raise nearly $13 billion in taxes over the 10-year period.

The industry contends that the proposals are inconsistent with the administration’s goal of shoring up the nation’s retirement system.

Treasury Secretary Robert Rubin hasn’t conceded defeat, but the opposition has lined up much support on both of the key congressional committees.

Soon after the administration unveiled its budget early this year, the Washington-based Committee of Annuity Insurers got 33 of the 39 members of the House Ways and Means Committee to sign a letter to the panel’s chairman, Bill Archer of Texas, and ranking Democrat, Charles Rangel of New York, expressing concern about the plan to “impose new taxes on annuities and increase taxes on business and family-owned life insurance.”

The lobbying group also got half of the Senate Finance Committee’s members to sign a similar letter to Chairman William Roth Jr., R-Del.

Though the initiative appears to have stalled, “Our proposal is before Congress,” says Treasury department spokesman Paul Elliott. “There’s a process in place. We’re not going to speculate on the future progress or demise of something like this.”

The insurance lobby has worked hard to block the administration’s proposals. American Council of Life Insurance set up an 800 number for information on the issue, Mr. Welsh said, and Hartford set up a toll-free number that patched callers through to congressional offices to speak directly to Capitol Hill staff.

Saved customers for later

Most companies did not ask customers to get involved, Mr. Welsh said, because it appeared the proposals would not go far. “We were saving customer reaction for another wave of lobbying if we needed it,” he said.

Jeff Ulness, vice president of product management for American Skandia, said his company set up 800 numbers so employees could call Capitol Hill to oppose the proposals. They also “enlisted people who sell our contracts,” urging them to lobby against the measures, he said.

A lawyer who worked on the issue, Richard Belas of Davis & Harman in Washington, says that industry-commissioned studies indicating that most policyholders use variable annuities for retirement plans have proved crucial in fending off attempts over the past several years — by Republicans and Democrats alike — to end their favorable tax status.

“As the Social Security debate goes on, we’ll be able to use those in the future,” Mr. Belas says.

Also aiding the cause were the mutual fund, banking and securities industries. “That bodes well for the future,” Mr. Welsh said.

The Treasury Department has contended that variable annuities enjoy better tax treatment than mutual funds. “It makes it much more difficult for Treasury to say they’re leveling the field with mutual funds when the mutual fund industry is saying, ‘They’re just fine the way they are,’” Mr. Belas says.