A discussion draft of tax reform legislation being reviewed by a U.S. Senate panel contains a provision that would change the tax treatment of affiliated reinsurance.

The discussion draft, released Tuesday by Senate Finance Committee Chairman Max Baucus, D-Mont., would no longer allow U.S. subsidiaries to deduct the cost of reinsurance that is ceded to affiliates not subject to U.S. taxes.

This is similar to legislation that has been introduced previously in the House of Representatives and the Senate by Rep. Richard Neal, D-Mass., and Sen. Robert Menendez, D-N.J., respectively, but never brought to a vote.

In addition, the Obama administration has supported the tax change in previous budget proposals.

The Risk & Insurance Management Society Inc. has long opposed the change. The insurance industry itself is divided on the issue.

The discussion draft, which includes the reinsurance proposal among other tax changes, drew immediate fire from free-market groups and others.

“In order to make coverage available for big catastrophes — everything from earthquakes and hurricanes to crop failures to acts of terrorism — the U.S. market relies to a significant extent on insurance capacity provided by global companies,” R Street Institute Senior Fellow R.J. Lehmann said in a statement. “This protectionist scheme, long sought by a handful of large domestic insurance groups, would inevitably make the United States less attractive to global insurers and reinsurers, encouraging them to commit their capital elsewhere.”

%%BREAK%%

“The decision by Sen. Max Baucus, D-Mont., to include this provision in the Finance Committee’s draft ignores warnings from elected officials, state insurance commissioners, trade experts and consumer advocates that this tax would drive up the cost of insurance to homeowners and small businesses,” the Coalition for Competitive Insurance Rates, of which RIMS is a member, said in a statement.

The Coalition for a Domestic Insurance Industry, a group of about a dozen U.S.-based insurers led by W.R. Berkley Corp., has supported the reinsurance tax change.

The Senate Finance Committee has requested public comment on the proposal.