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SMALL COMPANY TAX INFLATION ADJUSTMENT ACT

(Current as of April 2003)

THE ISSUE IS: Preserving the tax-exempt status of small, mutual insurance companies.

IT'S IMPORTANT BECAUSE: Since 1921, small insurance companies have been exempt from paying federal taxes. The rationale behind this exemption was so that all available financial resources of the companies could be used solely for claims paying.

Under the current Internal Revenue Code (Section 501(c)(15)), an insurance company with up to $350,000 in direct or net written premium, whichever is greater, is tax-exempt. In addition, Section 831(b)(2) allows companies with direct or net written premiums, whichever is greater, exceeding $350,000 but not exceeding $1,200,000 to elect to be taxed on their net investment income. Investment income or assets are not considered when determining qualification for either tax-exempt status or investment income taxation. Thus, it has been public policy to provide small, rural, farm-oriented insurers with exemption or election status so that all Americans have access to coverage at a reasonable cost.

However, the tax-exempt level and the investment income election levels have not been increased since the Code went into effect in 1986. For instance, what was once $350,000 in 1986 is now $575,000, and what was once $1.2 million is now $1.971 million. Thus, while a company's annual costs have increased over the years with inflation, the tax-exempt and investment income election levels have not.

Federal legislation to increase the tax-exempt and net income election levels for small, mutual insurance companies has been introduced in the 108th Congress. In the Senate, Senators Christopher Bond (R-MO) and Tim Johnson (D-SD) introduced S. 735 on March 28, 2003. A few days later on April 1, 2003, Congressman Jim Nussle (R-IA) and five other Representatives introduced an identical version of the legislation in the House of Representatives. Both S. 735 and H.R. 1530 would serve to increase both the tax-exempt and net income election levels for small insurance companies. In addition, both bills index these levels according to a cost-of-living adjustment.

NAMIC POSITION: NAMIC supports legislation that would increase the tax-exempt and investment income election levels to reflect inflation changes since 1986. Because small, mutual property and casualty insurance companies have such limited financial resources, all of their assets must be preserved for claims paying to ensure their important niche market in America. Providing these small insurers with tax-exempt status accomplishes that goal.

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