The voice for Bermuda?s insurance and reinsurance companies is preparing to lobby the US Treasury over a new US law that significantly increases the tax burden for Americans living in places such as Bermuda.

President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 into law in May. While the law increases the amount of foreign-earned income that can be exempted from US taxes to $82,400 from $80,000, it significantly caps housing allowances ? a benefit that has helped attract Americans to live in high priced Bermuda. In the past, Americans could deduct virtually all of their housing expenses. Under the new law, their housing allowances are capped at just under $12,000 in 2006.

While there are plenty of other concerns about the tax changes, the Association for Bermuda Insurers and Reinsurers is zeroing in on the housing allowance cap. That is because there is a provision in the new law that allows the US Treasury to change this cap in jurisdictions with a higher cost of living. ABIR plans to file a report detailing Bermuda?s high cost of living with the US Treasury.

?Congressional staff are interested in making sure that Treasury follows their intent and their intent clearly stated that they would recognise a greater housing allowance,? said ABIR president Brad Kading.

Last month, South Carolina Republican Senator Jim DeMint responded to the controversial law by proposing a bill to completely eliminate the cap on foreign earned income.

Mr. Kading said it is unlikely that the legislation will move in the 2006 legislative session since the sponsor of the legislation is not on the key committee and it is an election year. Even after the election, however he sees the chance of overturning the law as ?very remote?.

?The US budget runs a huge deficit that means they are always looking at ways to raise money so it is very hard to make a change,? he said.

Ironically, US Consul General Gregory Slayton, Premier Alex Scott and his contingent were in the White House on May 17, the very day President George W. Bush signed the tax changes into law.

Mr. Slayton told this newspaper last week that he had a number of sidebar conversations on the issue with close friends in the White House that day. The discussions did not include the Premier and his team.

Mr. Slayton, a Republican who was the co-chairman of the Silicon Valley Bush 2000 fundraising committee, said that as a former businessman and as a former American expatriate he totally understands the concerns of American individuals and companies.

?There is a lot of heartburn about this recent tax as there are about all taxes, but this one has some really pernicious affects on America?s ability to be effective overseas,? he said.

He continued: ?I?m a Republican. Obviously I believe in small efficient government and low taxes. I believe people should keep as much as they earn as possible and so I am just philosophically opposed to big government and big taxes.? Most of the 8,000 Americans living in Bermuda are dual nationals ? generally Bermudian /Americans who are not necessarily expatriates. However they too will be hit in the pocketbook if their earnings exceed the foreign earned income cap.

Not surprisingly, American employees and employers have been contacting Mr. Slayton on a daily basis since the law came into effect.

?Anyone that represents the US overseas, ambassadors in every developed country where the US has significant business interests are concerned and getting lobbied by Americans and that is the way the process works,? he said.

The majority are concerned about the fact that the tax is retroactive to January 1 this year so not enough tax has been withheld from their paycheques for the first five months of the year.

People are also concerned about the uncertainty surrounding the housing cap, about whether their employers will absorb the increases and what this will mean for future employment opportunities abroad.

ABIR is not collecting information on how individual employers are dealing with the changes internally and recruiters at two local recruitment agencies said it was too soon to tell how the changes would impact employer?s hiring practices.

However employers have told Mr. Slayton that it has become virtually impossible now to hire Americans when other countries do not tax the foreign earned income of their citizens.

?I know of number of employers who were on the verge of hiring Americans and who have turned to hire Canadian or English or Scots or whatever,? he said.

David Ezekiel, chairman of the Association of Bermuda International Companies, has also heard from members who are now trying to address the issue.

?It is one of those things where not a whole lot one can do and each company has to take a position on how they want to deal with it,? he said.

He anticipates that companies will treat the increased taxation in the same way they currently approach payroll tax. While some will take on the whole burden, some will share it with their employees.

?Everyone is all over the place on it. Clearly what it will do is radically change the compensation structure for some individuals and therefore each company is taking different approach depending on how they approach the whole the are of compensation but it is something that does impact a lot of the companies in our sector with US employees,? he said.

As for the future of American employees in Bermuda, he doubts the tax will end up causing the majority of companies to avoid hiring Americans.

?One tries to find the best people and at the end of the day one tries to craft a compensation structure that you think will attract them so it certainly might mean that it will be more expensive for companies to hire people they want.

?Not only that, it might be more expensive for companies to retain people they have, but I don?t see it leading to big change in hiring because a lot of the people we are talking about come with an expertise that is in short supply so at end of the day they will do what it takes to sort of make it work,? he said.