The tax on climate change

As environmental catastrophes, like storms and earthquakes, appear more frequent, the ability of consumers to protect themselves from significant financial losses is more paramount than ever. But as American consumers, as well as state and local governments, prepare to cope with climate change, things will soon be much more expensive for consumers, in part due to the administration’s support for an OECD international tax proposal and the SHIELD plan – both set to hoist insurance premiums, as well as thousands of other goods and services.

One major part of the OECD’s tax proposal rests on establishing a minimum tax rate intended to discourage multinationals from moving their headquarters to lower-taxed nations — a practice referred to as venue shopping. The Biden administration originally proposed the minimum tax be set at 21 percent but later suggested that it be no lower than 15 percent — all providing some “cover” for the imposition of higher corporate tax rates at home. The proposal also reflects the Biden administration’s wider commitment to ensuring that corporations “pay their fair share of taxes.”

A global minimum tax would allow governments in high tax countries, like the United States, to tax corporations headquartered within their borders the difference between the minimum rate and the rate paid on international profits. Under the proposed OECD tax plan, if a corporation in, say, Latvia sells to an American company, the U.S. would tax the Latvian corporation as much as 21 percent of its profits.

At the same time, the administration is planning, as part of its Made in America Tax Plan, to institute a tax on international transactions, a provision referred to as the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) Act, that would make sure that multinational companies headquartered overseas pay the differential of U.S. taxes which could increase to a rate of 28 percent.

The one-two punch of the OECD and SHIELD plans would guarantee higher prices on consumer goods in the U.S. and across the globe, including the cost of insuring property against catastrophic events stoked by climate change, like hurricanes and flooding.

Property insurance is an essential component in the cost of homeownership for American consumers. In the process of offering policies to homeowners, insurance companies usually protect themselves against the unlikely event of a major catastrophe by buying “reinsurance” — essentially insurance for insurance companies. Reinsurance spreads the risk of property losses from hurricanes, earthquakes, and other natural disasters across the globe. From year to year, reinsurers accumulate and reserve surplus money during good years to pay claims in extraordinarily catastrophic years.

The proposed plans would potentially expose this reserve to taxation, which leaves fewer surplus dollars available to pay for claims in years marked by an uptick in catastrophes. This leaves reinsurers with no choice but to raise their rates to insurers, who simple flow these added costs along to consumers in the form of higher premiums. Unlike political promises to the contrary, there would not be an exception for middle-class consumers — all consumers would pay higher homeowner insurance costs to protect their property.

Insurance represents the means by which consumers, businesses, municipal governments, and some state catastrophe funds protect property and infrastructure from storms, fires, floods, and natural disasters, as well as terrorist and cyberattacks. By sharply raising premiums, consumers would be required to pay significantly more for the same level of protection or go uninsured. As the U.S. rejoins the Paris Agreement and the administration expresses concerns over climate change, a sounder policy would be to focus on mitigation and increased preparedness.

A number of nations have used low corporate taxes to grow into prosperous economies. Ireland, for example, has been able to position itself as one of Europe’s largest tech hubs, and a number of Caribbean nations have used low corporate tax rates to become global financial hubs. For example, Bermuda’s reinsurers have paid “nearly a quarter of a trillion dollars in claims from natural and manmade disasters in the U.S. and European Union alone,” over the last 20 years, according to the Association of Bermuda Insurers and Reinsurers.

The contention that taxes would only affect multibillion-dollar corporations and not middle-income America is simply not true. The OECD and SHIELD tax plans will not spare consumers the cost, and the economic impact will go far beyond insurance products.

As storms begin brewing near the gulf and the Caribbean Sea, and as the number and severity of storms increase, the need to keep insurance premiums low has become crucial. The administration should not be raising the cost of protecting American families from environmental disasters. Public policy should not tax what needs to be encouraged.

 Steve Pociask is president and CEO of the American Consumer Institute, a nonprofit educational and research organization. For more information about the institute visit www.TheAmericanConsumer.org or follow us on Twitter @ConsumerPal.