With foreign-domiciled reinsurers accounting for a sizeable portion of the reinsurance capacity available to U.S. cedents, how these foreign reinsurers are taxed has long been a source of controversy.

With legislation pending in the U.S. House and Senate to disallow tax deductions for reinsurance premiums paid to affiliates based in any jurisdiction not subject to U.S. tax law, the issue is resurfacing.

“This proposal has been introduced in various forms since 2000,” said Tracy D. Williams, a Chicago-based partner with law firm of Sidley Austin L.L.P.

She said the House and Senate bills are intended to correct a perceived advantage for the foreign-domiciled reinsurers, which pay an excise tax on reinsurance premiums while U.S.-based reinsurers pay an income tax on the premiums they earn.

“The idea was for domestic companies to pay the income tax and for foreign companies to pay the excise tax,” Ms. Williams said. “There are some that believe that this is an adequate substitute and others that believe that the excise tax is insufficient to level the playing field.”

Prominent supporters of the legislation include the Coalition for a Domestic Insurance Industry, which represents 13 U.S.-based insurance groups, including Berkshire Hathaway Inc., The Chubb Corp., W.R. Berkley Corp. and Liberty Mutual Group Inc.

William R. Berkley, chairman and CEO of W.R. Berkley and chairman of the Coalition for a Domestic Insurance Industry, said the issue is one of basic fairness, contending that current U.S. law gives a preference to foreign-controlled reinsurers over their domestic competitors.

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“They should allow all of us to use it or none of us,” Mr. Berkley said of the tax deduction.

Opponents of the legislation include the Coalition for Competitive Insurance Rates, whose members include insurers such as Ace Ltd. and Zurich North America as well as the Risk & Insurance Management Society Inc. They contend passage of the bills would cause foreign-based reinsurers to restrict their business in the United States, harming customers by raising the cost of insurance.

“We are making the case that these bills are bad for the consumer because they will lead to restrictions in the reinsurance marketplace,” said Bradley L. Kading, president of the Association of Bermuda Insurers & Reinsurers, another member of the coalition opposing the bills.

Moreover, European governments can make the case that passing these bills would violate international tax treaties such as the General Agreement on Tariffs and Trade, Mr. Kading said.

Nonetheless, Mr. Berkley countered that the current rush of alternative capital into the reinsurance space negates the argument about a lack of capacity if foreign-domiciled insurers were to retreat from the market.

Kirk Van Brunt, a Washington-based partner at Locke Lord L.L.P., said despite intense lobbying by both sides, the bills' future is far from certain given the congressional gridlock in Washington.

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“Some form of this proposal has been rattling around Washington for many years,” Mr. Van Brunt said. “It keeps coming back and never goes anywhere, so I don't have any reason to think this is going to go anywhere either.”

Yet Mr. Kading said there is concern among opponents of the legislation that the issue may be wrapped into broader efforts at tax reform.

“The arguments for these bills have not been persuasive in the past, but the key question now is whether we get swamped by the need for new revenue,” Mr. Kading said.

Mr. Van Brunt said recent history has shown a limited ability for politicians to make large changes to the U.S. tax code.

“Other than the Tax Reform Act of 1986, any other attempt to do comprehensive tax reform never gets off the ground,” he said. “It is going to take a sea change politically before anything meaningful is going to be done.”