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US: For Dean, 'Captive' Insurance a Vermont Boon

by Michael KranishBoston Globe
December 12th, 2003

Howard Dean is fond of criticizing politicians who provide tax breaks to "large corporate interests," and one of his favorite campaign lines is a blast at the Bush administration for doling out tax cuts to top executives of Enron Corp.

But during Dean's 11 years as Vermont governor, he enacted tax breaks that attracted to the state a "Who's Who" of corporate America -- including Enron -- to set up insurance businesses. Indeed, Dean said in 2001 that he wanted Vermont to "overtake Bermuda" as the "world's largest" haven for a segment of the insurance industry known as "captives," which refers to firms that help insure their parent companies.

With little notice then -- and barely any mention now in the Democratic presidential campaign -- Dean succeeded in turning Vermont into the kingdom of captives. Vermont has more of these companies than the other 49 states combined. As part of the enticement, Dean led efforts to cut state taxes of such companies, and he helped defeat a Clinton administration effort that would have eliminated $100 million worth of federal tax deductions given to the industry.

But while the nearly 500 captive insurance companies have been a windfall for Vermont -- providing 2 percent of the state's general funds from tax on the $7 billion worth of premiums that go through Vermont annually -- the industry also is highly controversial. Some analysts believe that while Vermont profits, other states lose corporate tax revenues because of the way a company's taxable income may be reduced if it uses captives.

"Dean apparently has no problems with tax havens as long as they are in the state of Vermont," said University of Connecticut Law School professor Richard Pomp, author of the textbook "State and Local Taxation." "He can't have it both ways, because Vermont is acting like a little Bermuda."

In fact, Dean has often complained about Bermuda's tax haven status, saying that the United States needs a president "who doesn't think that big corporations who get tax cuts ought to be able to move their headquarters to Bermuda."

Dean spokesman Jay Carson said there is no contradiction between Dean's complaints about President Bush's corporate tax breaks and the former governor's own efforts to help the captive insurance industry. "This is a legitimate industry, perfectly legal. It helped the economy here, and Governor Dean is going to make no apologies for that," Carson said.

As governor, Dean saw his competitor for this business as Bermuda, which hosts nearly three times as many captives as Vermont. "We consider our competition to be Bermuda or the Cayman Islands," Dean said in a 2001 article published by the A.M. Best Co. "We feel pretty good about what we are doing, but it is competitive. Our goal is to overtake Bermuda as the world's largest captive domicile." Carson, the Dean spokesman, said yesterday the governor was referring at the time to his desire to "bring jobs and revenue back to the United States."

While the captive insurance industry began arriving in Vermont before Dean began his 11-year term as governor, Dean heavily promoted the industry and it grew dramatically under his administration into a key revenue source.

"In terms of benefits to the state, this is one of the crown jewels in the state's tiara," said Lisa Ventriss, who until last year ran the Vermont Captive Insurance Association and is now president of the Vermont Business Roundtable. "There is maple syrup and skiing and cheddar cheese and captive insurance. What more could you want from life?"

Molly Lambert, who served from 1998 to 2002 as commerce secretary under Dean, said he played a key role in attracting captive insurance business. "The governor would meet personally with captive owners when they came to the state on many occasions," said Lambert, who now heads the Vermont Captive Insurance Association. "If he knew the managers or owners would be in town, they went to his office, or he went to them. He went to all the association gatherings. The accessibility to the governor for the industry has been just incredible."

The companies owning captives in Vermont range from Microsoft to Dupont to Enron, according to a list provided by Vermont officials in response to a request from the Globe.

As a presidential candidate, Dean has attacked Bush for giving tax breaks to "Ken Lay and the boys who ran Enron." But Enron apparently was attracted to Vermont because of the benefits offered under Dean's administration. Dean, who became governor in 1991, cut taxes in 1993 by up to 60 percent on the premiums paid by the parent companies to the captives at the same time he was raising the state sales tax and cutting spending. Dean's tax cuts on captives set off Vermont's boom in that industry.

In December 1994, Enron set up a captive insurance company called Gulf Company Ltd., which is managed by USA Risk Group, a company in Montpelier that specializes in managing captive insurance companies. Indicating the closeness of a captive to its parent corporation, Enron's former chief financial officer, Andrew Fastow, was on the Gulf board and made one appearance at USA Risk's Montpelier office, a company official said. (Fastow is no longer on the Gulf board, and Enron has filed for bankruptcy.)

Becky Aitchison, the account manager for Gulf Company Ltd., which is still in operation, said that Enron created a captive insurance company in Vermont as a way to make up for the high deductibles demanded by traditional insurance companies. While she could not discuss the Enron specifics due to a confidentiality agreement, she provided the hypothetical example of a company that has a $1 million deductible on a traditional insurance policy and decides to create a captive to be responsible for paying the $1 million. The company would pay premiums to its own captive, which in turn could invest the premiums, to generate more income. Under Vermont law, she said, the premiums are subject to a top tax of 0.4 percent, but the profits on the captive's investment of the premium are not subject to Vermont's corporate income tax, which a state official said ranges from 7 percent to 9.7 percent.

Depending on how the captive was set up, such profits also might not be subject to corporate taxes in the firm's home state, according to Pomp, the University of Connecticut tax specialist. Moreover, the premiums paid by the parent company to the captive might be deductible from federal taxes if the entity is set up according to certain guidelines, which in turn could also reduce a company's home-state taxable income. It is this potential for diminished tax revenues in a company's home state that has led some analysts to criticize the way captive insurance companies have become so popular in Vermont.

Companies use captives instead of traditional insurance because of the tax advantages, an inability to get insurance from traditional insurers, and a reluctance to share the higher premiums that might be set due to a riskier pool of client.

"If set up properly, they get deductions on the premium, they pay a low rate on the premium in Vermont, and then they take their premiums and they invest them and there is no further tax on them in Vermont or any other state, so it is a triple whammy," said Pomp.

Leonard Crouse, Vermont's deputy commissioner of captive insurance, agreed there may be cases in which the parent company pays less taxes in its home state because the captive operation in Vermont reduces taxable income.

"That is true," Crouse said. "They pay less taxes, I'm sure, in those states . . . Periodically you hear different states bringing that up." But he said the tax situation was only one of many reasons that companies choose to set up captive operations in Vermont, noting the state's friendly regulatory climate and its staff of 20 employees devoted to serving the business.

In 1996, the Clinton administration tried to end the deductibility of some captive premiums as part of its effort to reduce the federal deficit. The measure, which would have imposed $100 million in federal taxes and might have killed much of the US captive industry, was opposed by Dean, who wrote a letter to President Clinton complaining that the idea was "bad public policy," according to a 1996 article in Business Insurance.

The captive insurance industry is the type of clean, high-paying industry sought by Vermont. The state receives $18.5 million in premium taxes and licensing fees, amounting to about 2 percent of the state's general fund, according to Daniel Towle, Vermont's financial services director. In the most recent year, captive companies had deposited about $1 billion in Vermont banks, and about $7 billion in premiums annually flow through Vermont, Towle said. About 1,000 people are directly or indirectly employed by the captive industry, and they earn two to three times the typical Vermont wage, a state official said. Competition is on the horizon. Some states, such as Arizona and Hawaii, have no tax on premiums, and the Vermont Legislature this year lowered its premium tax by 5 percent and capped the overall tax on any captive at $200,000 per year. Massachusetts has no captive insurance companies, partly due to requirements for capitalization, state officials said.

Michael Kranish can be reached at kranish@globe.com.





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