When you read about the tax cut bill in the newspapers, you learn mostly about the big picture issues. Should there be tax credits for children? What tax should there be on capital gains?
But under the surface, dozens of private companies are angling to get or preserve special tax advantages. Often, they win usually by promoting their deal as a public service.
But if taxpayers are going to subsidize something, it should be discussed directly. It shouldn't be tolerated as a loophole that hands tens of millions of dollars in tax breaks to a particular corporation.
Which brings us to the question: Should a loophole be allowed for a mortgage insurance program developed by Fannie Mae, a private but government-favored corporation that supplies money to the mortgage market?
Fannie Mae buys home mortgages from banks and other lenders. Its operations are backed by a government guarantee that lets it raise funds at a low rate of interest.
In the "good works" part of Fannie's proposed program, it would offer a package of credit insurance to first-time homeowners whose loans it buys.
This coverage would pay your mortgage for three months if you lost your job or became disabled. If you died while holding the mortgage, a life insurance policy would pay it off.
For tax purposes, this insurance package is considered a form of taxable income. If you took the coverage, you'd pay a modest tax each year perhaps $50 or $100, Fannie says.
Fannie would keep the life insurance going for as long as you lived. You'd owe the tax for the mortgage's full term say, 15 or 30 years even if you moved and repaid the loan ahead of time.
If you died within that term, your heirs would get 75 percent of the loan's amortized balance.
Fannie would get the remaining 25 percent plus all the proceeds from policies on people who died after the mortgage's full term but only up to a "reasonable" return on costs, says Fannie Mae Senior Vice President Adolfo Marzol. Any excess would go the policyholder's estate.
What's wrong with this picture? Fannie Mae isn't really paying for the policy. American taxpayers are paying and giving Fannie a profit, besides.
The congressional tax-writing committees think that Fannie Mae, together with other corporations that might copy this scheme, could cost taxpayers $2.2 billion over 10 years.
Congress has been trying to plug this particular loophole. Just last year, it stopped a version of the game then being played by such leading companies as Wal-Mart, Winn-Dixie, AT & T;, GTE, Procter & Gamble and Walt Disney.
Those companies bought life insurance on their employees, borrowed the money back in the form of loans against the policies, took tax deductions on the loan interest, earned tax-free interest on the policy's cash values and collected the policy's proceeds tax-free when the employee died. Congress ended this tax abuse by disallowing the deduction on the policy loans.
Fannie Mae is doing something different, Marzol says. Instead of borrowing money to buy the insurance, it's paying the premiums out of its retained earnings and not taking a tax deduction. It's also insuring borrowers, not employees.
But the money Fannie spends on the insurance could have been used to lower corporate debt. So it's carrying extra corporate loans and taking the tax deductions there. This is the Wal-Mart game with another face.
Fannie hopes to drum up support by touting the benefits homebuyers get. Some legislators are on its side, including Sens. Christopher Bond, R-Mo., Christopher Dodd, D-Conn., Kent Conrad, D-N.D., and Barbara Mikulski, D-Md.
But those who succeeded in closing the version of this loophole exploited by Wal-Mart and others, including Rep. Bill Archer, R-Texas, aren't taking the bait.
One source likened it to justifying a bank robber because he spent money on good causes. Fannie Mae whose Chief Executive James Johnson earned around $6 million last year doesn't look enough like Robin Hood.
Archer's tax bill would deny Fannie Mae an interest deduction on some of its other corporate loans. Marzol says that wouldn't be fair, but he adds that Archer's approach would indeed kill the mortgage insurance scheme by making it uneconomical.
I think it's nifty that Fannie Mae wants to give insurance to homebuyers. But to keep this program from being a tax sham, Fannie's shareholders not taxpayers should pay the bill.
Changing of the Watchdogs
For financial planners and investors who use them, July 8 marks the changing of the watchdogs. It's going to open a hole in the investor-protection net.
Until now, investment advisory firms, including financial planners who give investment advice, have been regulated by the Securities and Exchange Commission.
The SEC rarely got around to checking planners, especially the little guys. But at least the planners were making key disclosures on the SEC's form ADV (for "adviser"').
The ADV, Part 2, lists the planning firm's services and investment methods, the principles' education and business background, and the way customers are charged. By law, new customers get Part 2 or a brochure with the same information.
Firms also file Schedule D's for each adviser, which details his or her background and disciplinary history, if any.
But starting next month, the SEC will no longer oversee planning firms that manage less than $25 million. A law passed in Congress last year limits its jurisdiction to larger firms.
The smaller firms, which account for two-thirds of those now registered with the SEC, will be regulated by the states instead.
But there are holes. The states can regulate only the planners who have an office and at least six clients there. If you're solicited by someone in another state in person or by phone your own state won't have his or her background on file.
To protect yourself, and if you're doing business with a larger firm that still reports to the SEC, get its ADV each year. Also ask for your planner's Schedule D. By law, you only have to be told about any disciplinary actions against the planner but I wouldn't do business with a firm that didn't release the Schedule D's.
If you're using a smaller firm, ask for its state disclosure form, which should include employment history, fees and disciplinary history. If you can't get a form, don't deal with that adviser.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
For reprint and licensing requests for this article, CLICK HERE.