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therefore exempt from taxes other than those imposed on premiums and real estate.
NEED FOR LEGISLATION A holding company system, consisting of insurers and noninsurers, with the latter receiving dividends from the former is at a competitive disadvantage as compared with a "down-stream” holding company, under otherwise equal conditions, since it is exposed to double taxation.
In view of the centralized control inherent in a holding company system, the non-insurer parent is able to change the domicile of the insurer, by moving the operations outside the District of Columbia, and thereby avoids paying the tax.
The migration of insurers creates a temporary economic waste for the insurer but improves its long-term competitive situation. The byproduct, however, is long-term economic losses to the District of Columbia and hardships for the employees of the insurer to a differing degree depending whether or not they are able to relocate or find other employment.
As more reorganizations, utilizing the concept of the holding company system are to occur, insurers will reincorporate outside the District of Columbia, move their home offices, and new insurance companies will also be formed outside the District of Columbia rather than here, to avoid paying additional taxes which would be due to the change in the organizational structure but not due to the generation of additional income since none is generated.
Long-term planning applicable to the location of insurers is heavily influenced by taxation on the State level.
If insurers, to avoid the additional tax, will move their corporate offices, the tax will not become due. The move will be economically harmful to the District of Columbia and the lack of formation of new insurers here will reduce the creation of new employment opportunities.
This testimony is to express the concern over possible adverse economic repercussions caused if the bill H.R. 6186 is not enacted. In neither case will tax revenues be created.
Section 2 of the bill contains retroactive features. This department could not identify any reasons to support the enactment of section 2, despite the apparent need for the other provisions of the bill.
Mr. STUCKEY. Thank you, Mr. Wallach.
Mr. ROBINSON. Mr. Chairman, you have before you the report from the mayor as to the merits of this bill. Without reading it, I would like to point out certain paragraphs in here which express more clearly the position of the District government. Beginning on page 2, I would like to repeat for the record the following excerpt from the Mayor's report.
The contention that under existing law dividend income, depending upon its source, receives unequal treatment in that parent corporations or holding companies need not pay taxes on such dividends when the subsidiary or paying corporation is subject to the District's franchise tax is understandable and not unreasonable from an equity standpoint. It must be pointed out, however, that enactment of H.R. 6186 would result in immediate revenue loss to the District Government and a potential greater loss in future years. The precise amount of such revenue loss is difficult to estimate since it appears that the existence of this tax liability has in some cases inhibited local insurance companies from declaring dividends which would become subject to taxation as income from sources within the District. However, under the retroactive provisions of Section 2 of the bill, one corporation alone would be eligible for a refund of approximately $165,000 for taxes paid in 1970 and 1971.
Because of the inequities which, under certain circumstances, may result in the double taxation of dividends and interest distributed by insurance companies to corporate stockholders, the District Government is not opposed to the enactment of Section 1 of H.R. 6186. We are, however, constrained to object to the passage of Section 2 of the bill in view of its impact upon District revenues. The financial loss to the District which would result from the refund of those portions of the franchise tax attributable to dividends and interest paid to corporations by local insurance companies in 1970, 1971, and 1972 is considerable and may seriously affect the District's ability to fund public services in the fiscal year beginning July 1, 1973, if the full amount of such tax reimbursements is required to be made in that year.
We recommend, therefore, that Section 2 of H.R. 6186 be deleted.
Subject to this recommendation, the District Government offers no objection to the enactment of H.R.6186.
Mr. STUCKEY. Mr. Robinson, in other words, the District of Columbia government is in favor of the bill as long as it is not retroactive?
Mr. ROBINSON. That is correct.
Mr. STUCKEY. It is my understanding the insurance companies are not strongly objecting to eliminating the retroactive part; is that correct?
Mr. Robinson. That is correct. We would recommend section 2 not be enacted.
Mr. STUCKEY. What you should do is make it retroactive with the understanding that they will donate it back to the District of Columbia government.
Mr. ROBINSON. If they would put it in writing, that would be desirable.
Mr. STUCKEY. Mr. Broyhill?
Mr. BROYHIILL. The section you read, Mr. Robinson, which stated "It must be pointed out, however, that enactment of H.R. 6186 would result in immediate revenue loss to the District government and a potential greater loss in future years”; how do you feel it would result in a greater loss in future years, if a failure to act causes other companies not to become established here, and may very well cause some of the companies who are operating here to move out of the city?
Mr. ROBINSON. That is right. Mr. Broyhill.
Of course, the matter of whether insurance companies do or do not leave the District is not a certainty; it is sort of conjectural. We are assuming that phrase you just quoted, that if the insurance companies remain here, there is a possibility should the bill be enacted there would be continuing revenue loss to the District of Columbia.
Mr. STUCKEY. Will the gentleman yield?
Mr. STUCKEY. Isn't it a fact one company is now considering moving out of the District?
Mr. ROBINSON. I so understand, Mr. Chairman. Mr. STUCKEY. So it is a reality that we are speaking of; not only will some move out, but we are certainly not encouraging any to move in that we can't collect taxes on. Is that not correct?
Mr. Robinson. That is true. What we are saying, if they do remain here and if the bill is enacted, there is a possibility.
Mr. STUCKEY. The possibility is not very good that they are going to continue to remain here. You can't have your cake and eat it, too.
Mr. ROBINSON. That is correct.
Mr. BROYHILL. The reason I wanted to get that part of the statement clarified is that I feel this is a fair and equitable tax to start with. But, in looking at this from the revenue standpoint, if we take this bill to the floor and it can be stated that this will result in greater loss of revenue in the future, it may cause some of our colleagues to feel that the existing law is not too inequitable and that it brings revenue in. Some of us are pretty much impressed with the statements that have been made that some of these insurance companies may be forced to leave the District of Columbia, if something is not done to amend the act by passing this bill.
And if that is the case, then it would mean an increase in revenue in the future by passing this bill.
Is that possible, Mr. Robinson?
Mr. Robinson. Looking at it from an overall picture, Mr. Broyhill, your statement may be correct. All we are saying is at present there is a tax liability and, obviously, if it is eliminated, then there wouldn't be taxes. As you correctly point out, the District government feels it has an obligation to report to the Congress any time there is a possibility of a revenue loss from taxation of dividends to the District government.
Mr. STUCKEY. Will the gentleman yield?
Mr. STUCKEY. Isn't it also true there is no other political jurisdiction that has this particular double tax? You don't know?
Mr. ROBINSON. I don't know of any.
Mr. STUCKEY. So it is peculiar to the Districit of Columbia and it is something this bill will correct and it needs correction.
Mr. Robinson. It is for those various reasons which you and Mr. Broyhill have indicated that the District government does not offer any objection to the enactment of section 1 of the bill.
Mr. STUCKEY. I think you will find that this is the only jurisdiction that has this double tax.
Mr. BROYHILL. Do any of you people who represent the D.C. government feel that this provision of double taxation is fair and equitable ?
Mr. ROBINSON. I don't think so, Mr. Chairman.
Mr. BROYHILL. If it is not fair and equitable, why would you oppose the retroactive provision, which provides for a refund of unfair and inequitable taxes collected because of unfair and unreasonable law?
Mr. ROBINSON. Mr. Broyhill
Mr. BROYHILL. Because of loss of revenue only? I can appreciate that.
Mr. Robinson. There is an essential difference between a prospective tax refund or a tax loss, as the case may be, as in comparision with one which has already gone into the District of Columbia revenues, and which, if section 2 of the bill were enacted, would require a refund be made. That money, of course, has been obligated. It has been expended by the District and would require an adjustment occurring in the future budgets in order to make the refund.
As we pointed out in our statement, that sum may be considerable.
Mr. BROYHILL. That is my point. I am not arguing that point. Your primary objection to section 2 is the loss of revenue.
Mr. ROBINSON. That is correct.
Mr. STUCKEY. I have no further questions. We certainly appreciate your testimony.
Mr. STUCKEY. Our next witness is Mr. Parker, chairman of the board of Capital Holding Corp.
Mr. Parker, we are delighted to have you with us this morning.
STATEMENT OF HOMER D. PARKER, CHAIRMAN OF THE BOARD,
CAPITAL HOLDING CORP.
Mr. PARKER. Mr. Chairman and members of the subcommittee, my name is Homer Parker. I am chairman of the board of Capital Holding Corp. Capital is a Delaware corporation which has its only place of business in Louisville, Ky.
I, too, am delighted to be here, Mr. Chairman. Let me say at the inception here, to the statement raised by section 2 of this bill: Capital takes the position that this was levied against us and is a tax that is really not right in every respect. We realize the problem and Capital takes the position that while we don't agree with the premises, we are a lot more interested in the future on this tax problem than we are about what has happened in the past.
Mr. STUCKEY. Thank you, Mr. Parker. I think that will make it a lot easier to pass this bill than to correct the inequities that have existed in
Mr. PARKER. Mr. Chairman, you have a copy of the report we have sent to Mayor Washington. We have also sent to each member of the subcommittee a copy of a report that I am about to give.
Mr. STUCKEY. If you would like, we would be delighted to have you summarize.
Mr. PARKER. I am going to say you are entitled to my sales talk on it. If you would like, we would file it with the committee.
Mr. STUCKEY. We will appreciate it very much and will make it a part of the record.
[The complete prepared statement of Mr. Parker, above referred to, follows:]
PREPARED STATEMENT BY HOMER D. PARKER, CHAIRMAN OF THE BOARD,
CAPITAL HOLDING CORP. Mr. Chairman and members of the subcommittee my name is Homer Parker. I am Chairman of the Board of Capital Holding Corporation. Capital is a Delaware corporation which has its only place of business in Louisville, Kentucky.
I am pleased to be here today to testify in support of H.R. 6186 and to answer, to the extent that I can, any questions which you may have on how this legislation will affect Capital.
We have provided each member of the subcommittee with a copy of the written statement submitted to Mayor Washington with respect to H.R. 6186, and copies of the statement which I am making now have also been distributed to subcommittee members.
Passage of this bill is extremely important to Capital Holding Corporation. In our judgment, it is essential to the continued existence within the District of Columbia of life insurance companies which are operated as a part of a holding company structure. Its passage will bring District law into conformity with both federal and State law regarding the taxation of intercorporate dividends and it will encourage District of Columbia life insurance companies to remain and expand their operations here. Its passage will also remove a serious impediment to the location here of other life companies operated within a holding company structure.
On the other hand, we believe that failure to enact legislation of this nature will more than offset the salutory effect of the regulatory climate which presently exists for life insurance companies operating in the District and will in fact, cause such companies to move to locations outside the District, with a consequent loss to the District of both revenue and jobs.
During the past 15 years, there has been a significant trend within the life insurance industry to conduct business within a holding company structure. There are now more than 50 such companies operating in the United States. From the partial list attached to this statement you will see that these companies represent an important and substantial part of the indusry. The reasons for this industry trend are easily identifiable :
1. the greater flexibility afforded management when operations are conducted within a holding company structure,
2. the increased financial strength of the group, and
3. the operating efficiencies which can be achieved within such a structure. The Capital Holding Corporation group is a case in point.
Capital was formed in 1969 by Commonwealth Life Insurance Company, an operating company located in Louisville, Kentucky. When Capital was organized, Commonwealth was its only subsidiary. Today, Capital owns a casualty insurance company, a real estate holding company, a finance company, and eight life insurance companies which do business in 43 states and the District of Columbia.
Capital provides its affiliates with management assistance and a variety of technical services, including investment counselling, actuarial services, and data processing services. Investment results have been improved, a greater variety of better insurance policies are being offered for sale to customers, and with the introduction of new cost controls the various operating companies have become more efficient. All in all, the competitive ability of the various members of the Capital group has been substantially improved.
This brings me to the subject at hand-Capital's ownership of Peoples Life Insurance Company.
Peoples is a District of Columbia corporation which became a member of the Capital group in December, 1969. At that time, Peoples' shareholders exchanged Peoples' stock which they owned for Capital Holding Corporation stock.
Peoples is one of the more important members of the Capital group. It is a well managed profitable life insurance company which does business in 14 states and the District of Columbia.
Under existing District law Peoples pays a tax on its premiums received from District of Columbia sources. This is a tax imposed in lieu of the corporate income tax. Most jurisdictions tax life insurance companies in this manner, because it is difficult to determine exactly what their net income is for income tax purposes.
It is the fact that insurance companies pay this "in lieu” net premiums tax, rather than the corporate income tax, which leads to the problem H.R. 6186 is designed to solve.
Most business corporations operating in the District of Columbia pay the corporate income tax. When they in turn, by way of a dividend, pay a part of their earnings up to a corporate shareholder, those earnings are specifically exempted by District law from being taxed a second time in the hands of the corporate shareholder. This, generally, is also the result under the Internal Revenue Code, and under the income tax laws of the various states. Corporate earnings are taxed only once at the corporate level. (Of course, earnings paid out as dividends to individual stockholders are taxed in the hands of such stockholders.)