As the House of Representatives prepared to leave for its month-long August recess last week, Rep. Richard Neal (D-MA) introduced legislation to repeal a controversial tax deduction used by foreign reinsurers. The bill, H.R. 3424, would disallow the deduction for excess non-taxed reinsurance premiums with respect to United States risks paid to affiliates.

Rep. Neal, who is the Chairman of the House Ways and Means Subcommittee on Select Revenue Measures, first introduced this proposal in 2008. Since that time, it has been the subject of a heated debate between U.S. and foreign insurers.

Offshore companies currently pay federal excise taxes roughly equivalent to the corporate income tax, and although any successful business wants to limits its tax liability, the current system does not afford anyone a permanent tax advantage. However, in Rep. Neal’s view (as well as the views of many domestic insurers), offshore companies are provided an unfair tax advantage and his proposal seeks to eliminate that perceived benefit. The counterpoint to the Neal position argues that the congressman’s proposal is a protectionist tariff and could possibly provide U.S.-domiciled companies a big upper hand by imposing an enormous, burdensome tax on supposedly excessive offshore affiliated reinsurance transactions.

This view also advances the argument that should H.R. 3424 become law, there would be little use for offshore affiliated reinsurance. Further, although U.S.-based reinsurers would sell more reinsurance, much reinsurance would simply vanish. The Neal opponents conclude that primary insurers would have to raise rates and reduce coverage in order to rebuild the financial cushion they now get from affiliated offshore reinsurance.

House Financial Services Committee Chairman Barney Frank (D-MA) has suggested his committee may consider H.R. 3424, or something similar, when the committee’s financial regulatory reform efforts resume in September.

In that vein, the Obama Administration took steps the last week of July to keep a large scale financial overhaul moving forward. In a meeting with the nation’s top financial regulators – including the Chairmen of the Federal Reserve, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation – Treasury Secretary Timothy Geithner reportedly voiced strong frustration with the process thus far, citing concerns over the regulators’ criticisms of the Administration’s oversight proposals.

In Congress, the key players in the debate – Chairman Frank, and Senate Banking, Housing and Urban Affairs Chairman Christopher Dodd (D-CT) – have echoed the President’s goal of completing work on the overhaul by the end of the year. Whether what ultimately passes Congress mirrors the Treasury Department language remains to be seen, particularly in light of the concerns voiced by the financial services industry and federal regulators during committee recent committee hearings.

Exact timing for legislative action is also unclear, given the House and Senate’s already crowded agenda that includes healthcare reform, climate change legislation, and completion of the annual appropriations process. In addition, Chairman Dodd’s recent announcement that he will have surgery to treat early stage prostate cancer could further delay progress.