A US tax pressure group yesterday warned that President Obama’s budget proposals to end tax deductions for reinsurance payments to affiliated foreign companies and on overseas earnings would cost America more than three times what it would raise.

The Tax Foundation said that the budget proposals would cost more than $4 for every $1 it brought in to US government coffers — and that the US GDP would lose $1.35 billion over the long term — around double the revenue it would collect.

Alan Cole, an economist at the Washington-based Tax Foundation, said: “The proposal is well thought-out and serious, but ultimately mistaken on the policy merits.

“While the deduction eliminated is neatly matched with the income exclusion, there are substantial drawbacks to the proposal.”

And Mr Cole’s report said that the president’s proposals were “part of a worrying trend of piecemeal, industry-by-industry changes to an ailing tax code”.

The Tax Foundation report added that US GDP would be hit due to reduced business and investment capital because money would have to be diverted to tax revenue.

And it said that removing deductions would damage domestic insurers’ ability to remain stable and solvent since they rely on reinsurers’ international risk-sharing business model and capacity to distribute claims to insured people or organisations who suffer losses, which keeps costs lower for consumers.

The Tax Foundation report was backed by the Coalition for Competitive Insurance Rates, which includes the Association of Bermuda Insurers and Reinsurers (ABIR) and individual companies with Bermuda operations.

The US tax move, if adopted, could hit Bermuda reinsurers doing business with their US affiliates and make their operations on the Island less attractive.

The Coalition for Competitive Insurance rates has already written to a cross-party group of four members of the US Senate finance committee highlighting the risk to insurance operations in the US if the proposed tax changes went ahead.

The letter also warned that the changes were contrary to decades of US tax and trade policy and “inconsistent” with US tax treaty obligations.

And it warned that an end to tax breaks, which would have to be approved by the Republican-controlled Senate and House of Representatives, also broke World Trade Organisation commitments due to a ruling that a country cannot treat a foreign company worse than a domestic one.

A Bermuda Government spokesman said that the same proposals had cropped up in successive US budgets and been rejected by the US Congress.

And he pointed out that Republicans would be unlikely to back a Democratic proposal, while many Democrats had also signalled opposition.