Politics and Taxes Poised to Weigh on Broker Business

Major congressional tax bills intrinsically impact all businesses and individuals, but tax decisions coming in 2025 will have a profound impact on commercial insurance brokerages.

Writer’s note: Since this article went to print, Democratic presidential nominee Harris has publicly backed a 28% corporate tax rate (up from the current 21%).

Political uncertainty about those changes is likewise poised to be a significant factor in brokerage consolidation headed into next year.

Consider the stakes in recent decades of tax debates.

• In the late ’80s and early ’90s, court decisions imperiled depreciation of insurance renewal lists, threatening the brokerage sector’s core enterprise value. President Bill Clinton’s Tax Reform Act of 1993 established uniform 15-year depreciation of intangible assets. Because a brokerage’s value is entirely dependent on the intangible asset of customer renewal lists, agents and brokers helped lead the campaign for a uniform depreciation rate.
•  President George W. Bush enacted two tax cuts—in 2001 for individuals, in 2003 for investors. The long-term capital gains rate was lowered to 15%.
• Rates on the wealthy rose under President Barack Obama, and capital gains rates inched up.
•  In 2016, presidential candidate Hillary Clinton embraced a nearly 40% capital gains rate increase, depending on the length of the holding. Commercial brokerage M&A activity spiked in anticipation of her victory, but Clinton lost and capital gains were not raised.
• President Donald Trump’s 2017 Tax Cuts and Jobs Act (TCJA) had differing impacts on brokerages. Corporate income tax rates for domestically domiciled public companies and C Corporations dropped from 35% to 21%. Pass-through entities got a 20% rate cut that expires in 2025. Offshore domiciled firms and private equity-fueled enterprises, meanwhile, took some hits without losing their ability to thrive and expand.

Conventional wisdom is that business tax rates hold steady or decrease in a GOP presidential administration and rise under Democrats. That wisdom will hold true whether Trump or Vice President Kamala Harris wins the presidency in November.

But there are a bunch of wild cards. Will either party win the presidency and control both the House and the Senate? Conventional Washington wisdom (which is almost always wrong at this stage of an election) is that both chambers of Congress are likely to flip: the Senate to GOP control and the House to Democratic control.

The scheduled expiration of TCJA provisions ensures that the next administration and Congress will be forced to act on a major tax bill to prevent across-the-board individual tax increases. As he has throughout his presidency, President Joe Biden has proposed for FY25 top marginal rates upward of 40%, with increased corresponding capital gains rates (with exceptions for families making under $400,000).

If the election sustains a divided government, chaos is likely to prevail, no matter who is president. At this writing, Congress is nowhere close to coming to a budget deal just to get the country into the next administration. The national debt now stands at $35 trillion. (That’s $35,000,000,000,000.) The debt limit will be breached on Jan. 2 if no action is taken to forestall it (lame-duck Congress, here we come).

Theoretically, the 21% corporate rate is permanent under the TCJA. But two thirds of Council member firms are organized as pass-throughs, meaning their 20% rate will evaporate at the end of 2025 in the absence of an extension.

But it gets even more complicated. The pass-through rate in the TCJA debate started out as a break just for small businesses. Then congressional Republicans decided to open it to larger pass-through manufacturing organizations. Through Herculean political intervention (and an act of God or two), insurance brokerages were deemed eligible for the special rate (the Realtors won out on this, as well). That left a lot of other pass-through businesses out in the cold, and now they want the same special treatment—which only stretches the financial costs and may negatively impact the political prospects of extension.

But…if, if, if. If the Democrats sweep, expect legislation that would raise corporate and capital gains rates and likely would provide no pass-through (i.e., Section 199A) special breaks. If Harris wins but her party fails to retake both chambers of Congress, expect a brutal battle. Collective groan here: the race for the presidency in 2028 would be fully on.

A Bipartisan Threat

Is this a binary choice between Republicans being good on business taxes and Democrats being less so?

It’s not that cut-and-dried. The entire calculation of the employer-based health insurance system is at risk with the increasing cost shift to employers and unsustainable escalation of expenses. That is true no matter the political calculus.

But the consequences of the November elections could be daunting in both directions. The federal government’s No. 1 tax “expenditure” is the exception from taxation of employer healthcare coverage premiums. It’s a bigger number than the individual tax exceptions for 401(k)s, charitable contributions, or the home mortgage interest deduction.

On the Republican side, when the TCJA was being debated, then-House Speaker Paul Ryan (R-Wis.) and Ways and Means Chairman Kevin Brady (R-Texas) proposed scaling back the employer exception under a purist view of consumer-driven healthcare. Our industry and the employer community snuffed this effort out. I am relatively confident we can do the same again.

There are also risks to the employer community from the Democrats. Then-Senator and 2020 presidential candidate Harris was all over the map: the first co-sponsor of Sen. Bernie Sanders’s (I-Vt.) Medicare for All legislation, a vocal supporter of eliminating the private health insurance system, but then backtracked. The Inflation Reduction Act increased yet again the subsidies for citizens to sign up for Affordable Care Act exchanges, to the tune of $400 billion over 10 years. An additional “public option” in ACA exchanges—rooted in Medicare-pegged reimbursement rates—could shift costs and further undermine the employer market, albeit not in one fell swoop à la Medicare for All.

Perhaps the tax battles of 2025 will end with a whimper, but given the fiscal stakes, the economy, and America’s ideological polarization, it doesn’t feel that way. Anyone contemplating selling or buying an insurance brokerage has to be figuring political risk into the deal.

A long-haul uptick in capital gains creates a potential diminishment in value. Same if the brokerage is taxed as a pass-through—there’s a big difference between a 20% and 36% tax rate. But these are all sliding-scale determinations, influenced by a thousand factors. A progressive trifecta looks different than a conservative one, but equally likely are shades of gray, razor-thin majorities, and a potentially divided government.

Leave it to Yogi Berra to say it best: “It’s tough to make predictions, especially about the future.