For years, some Democratic members of Congress have been pushing a “reinsurance” measure that is protectionist in nature. Reinsurance is insurance purchased by insurance companies, and is of particular importance for Californians because of its role in protecting against widespread calamity – i.e., if a major earthquake or wildfire hits a particular region.

“The key function of reinsurance is risk-pooling to lower insurance company risk through global diversification. An insurer can reduce the impact of large losses by sharing (i.e., ceding) its exposure to particular risks,” explains a report released last week by the influential Brattle Group. It was produced on behalf of the Coalition for Competitive Insurance Rates and funded by the Association of Bermuda Insurers and Reinsurers.

In other words, in the case of a catastrophic event, it’s in the interests of insurance companies – and consumers – to have the risks spread across the globe, rather than concentrated in the United States or in one state in particular. Otherwise, unexpectedly high claims could threaten the solvency of the insurance companies. Without reinsurance to spread and pool different risks and kinds of catastrophes from all over the globe, insurers would have to charge significantly higher premiums to cover those risks.

Some congressional Democrats have for a decade been trying to pass tax legislation that would strip the U.S. subsidiaries of foreign-owned U.S. insurance companies from being able to write off the cost of reinsurance they buy from offshore affiliates. Advocates for this change argue that the transactions could be used to avoid U.S. corporate income taxes.

But it’s important to remember that more than 60 percent of the payments for the massive 2005 hurricanes (including Katrina) came from foreign insurance companies. In the event of an earthquake, it’s particularly important for insurance companies to be as diversified as possible, given that a major earthquake could have such an enormous impact on the resources of the U.S.-based insurance industry.

It’s not about tax avoidance, they say, but about the fundamentally sound insurance practice of diversifying their risk. They fear efforts to eliminate the tax deduction for these overseas reinsurance purchases would endanger their assets and distort U.S. insurance markets.

With the Trump administration in place, Capitol observers expect this seemingly arcane tax and insurance dispute to be addressed in his first budget – and they expect this traditionally Democratic idea to gain newfound support from congressional Republicans, who are eager to implement the new president’s agenda. The initial GOP budget blueprint could, in effect, impose a 20 percent import tax on reinsurance products. Those increased costs would not only inflate insurance prices for consumers, but reduce the number of insurance offerings or increase deductibles.

“We estimate that U.S. consumers would have to pay $9.3 billion more per year to obtain the same coverage,” according to the report. “In percentage terms, the proposed tax would increase the price of insurance by 0.8 percent, on average, and as much as 6 percent in some insurance lines.” In some business lines, the report pointed to a possible drop in available insurance coverage by 17 percent – even higher in regions where hurricanes and other risks are concentrated.

The national business-tax discussions center on efforts by the new administration to simplify the tax system for American businesses, by replacing the current corporate tax with a cash-flow tax. A U.S. Treasury Department report released this month explains that “By providing consumption tax treatment to business income, the cash flow tax creates incentives typically attributed to consumption taxes, such as increased incentives for investment, reduced distortions across different types of investment, and no distortion across the financing of investment.”

The Treasury report believes such a change would be beneficial in addressing issues such as income inequality, but finds that “globalization and the rise of multinational corporations has made clear the difficulties of attempting to tax income differentially based on where it accrues.” The international nature of the reinsurance industry highlights this particular problem in dealing with what is referred to as the “border adjustment system,” which taxes products and services where they are sold rather than where they are produced.

The goal of tax reformers is to encourage companies to produce more products in the United States and export them to other countries, but it’s unlikely that the insurance industry is what backers had in mind in proposing this change.

“Discouraging the purchase of foreign reinsurance would obviously provide incentives for more reinsurance purchases from U.S. companies, but only by distorting the global risk pool and reducing competition,” according to an Insurance Journal article last month by my R Street Institute colleague Lori Sanders. She backs the idea of eliminating “the outlandish number of tax loopholes riddled throughout our corporate tax code,” but cautions against doing so in a way that drives up domestic insurance prices and exposes Americans to additional risks.

The most prominent effort to repeal the tax deduction has come from Sen. Mark Warner, D-Va., and Rep. Richard E. Neal, D-Mass., but their legislation has not passed despite years of trying. This is a national issue rather than a California issue per se, but California’s susceptibility to catastrophic events is a major issue for those living here.

For instance, currently only a small percentage of Californians in earthquake-prone areas purchase earthquake insurance, with, for example, only 10 percent of them buying it in the San Francisco Bay Area. Any new laws or budgetary tweaks that drive up the cost or reduce the coverage (and increase the deductibles) can make Californians even more vulnerable to such risks. The California Earthquake Authority relies heavily on reinsurance, for instance, and reducing its availability even further increases the likelihood that taxpayers will be on the hook if the Big One strikes.

This tax-deduction issue is an example of how seemingly small changes in arcane tax policy can have a large, unforeseen impact – and how broad national political themes (buy American!) become difficult to implement when looking at the specifics of particular industries.

Steven Greenhut is Western region director for the R Street Institute. He is based in Sacramento. Write to him at sgreenhut@rstreet.org.

By Katy Grimes

Earthquake! Tonight in Sacramento, we felt the rumblings of a 5.7 earthquake centered in in Greenville, CA, in Plumas County — 300 miles from Sacramento.

This is considered a moderate earthquake. So far, there have been 13 small aftershocks reported.

This is a rare occurrence in Sacramento; we normally don’t feel the seismic activity in the state.

Within moments, friends on Facebook were posting about it. It only took two minutes for an insurance agent to encourage everyone to buy earthquake insurance.

One of my good friends said she was glad her wine did not spill.

Fortunately, it appears that the only damage may to be a few broken pictures. But local television news channels are acting as if Hurricane Sandy just swept through the north state. Local news shows have taken over all network programing, interrupting regular shows, blathering on and on about nothing. One station interviewed the same two college girls over and over again — one girl felt it, the other did not. Wow.

The 24-hour news cycle is bad — they are desperate to find a disaster. Local news stations have been taking phone calls from Greenville, Susanville, and Chester, CA residents who are reporting the broken pictures. One station sent out a reporter to interview local people who felt the tremor. Most people didn’t feel it. But the news people are behaving as if it’s the Loma Prieta Earthquake.

The news people are even interviewing each other about what they felt.

Greenville residents reported walls shook, tables moved, “trinkets have fallen off shelves…” and my hanging pots and pans clanged. Some Greenville residents had minor damage, but remember the area is near Mount Lassen, a dormant volcano. Anything could happen.

Potential damage — “moderate” according to the United States Geological Survey.

My favorite Facebook comment was Harmeet Kaur Dhillon in San Francisco: “Quitcherbellyachin’ people. 5.7 is peanuts.”

Katy Grimes: Thursday was “The Great California Shake Out,” earthquake preparedness day. I had the great fortune to be at the CalEPA building for a California Air Resources Board meeting in Sacramento, where we were expected to “drop, cover, and hold on.”

As I huddled on the floor with my notebook over my head, hoping that the carpet was clean, I wondered why there has been such a big media push by the Earthquake Authority.

Last year I contacted the California Earthquake Authority to ask who they are and why they advertise so much. The public information officer I spoke with was uncomfortable with my questions and wanted to know why I wanted to know. Finally I got him to tell me that the CEA is a publicly managed, mostly privately funded organization that provides catastrophic residential earthquake insurance. He was insistent that they are not a public agency.

Anyone who owns a home and lives within an officially designated earthquake area must have earthquake insurance. But I still find it highly suspicious that the earthquake authority is publicly managed and “largely privately funded,” especially since many homeowners are not given a choice about carrying earthquake insurance.

The Great California Shake Out program has plastered the airwaves recently and news lately, along with the CEA’s commercials about its insurance. The Great California Shake Out website is a bit of a mystery until you scroll down to the bottom of the page. The sponsors are FEMA, the Southern California Earthquake Center at USC, California Earthquake Authority, California Emergency Management Agency, the United States Geological Survey, American Red Cross and State Farm Insurance Company.

The other strange group attached is the Earthquake Country Alliance, the organizer of California’s annual earthquake drill, a project of the USC earthquake center, funded by the National Science Foundation and the U.S. Geological Survey. The National Science Foundation doesn’t actually do work, they fund other groups.

It’s all about the publicly-funded grants.

Obviously California earthquakes are real, but do a dozen agencies, boards, commissions and companies need to be involved? It’s a drain on public funds.

And their commercials are stupid.