The One Corporate Tax ‘Shelter’ Bernie Supported Is In His Backyard

Bernie Sanders has built his political brand, and surged to the top of the Democratic presidential field, on a platform that calls on corporations and the wealthy to “pay their fair share” of taxes. But as a representative of Vermont, Sanders played an instrumental role in preserving the very type of obscure tax avoidance scheme that he has come to villinize.

During his decades in the U.S. Senate, Sanders has met with and gone to bat for an sub-industry of corporate insurance companies that federal tax officials say is vulnerable to abuse. Known as the captive insurance industry, it’s a major business presence in Sanders’ home state—at one point, Vermont lagged only Bermuda and the Caymans in the number of captives incorporated there. The industry is also a significant source of revenue for the state. And while thousands of businesses large and small take advantage of the practice in perfectly legitimate ways, experts say its ability to shield income from tax collectors makes captive insurance a popular form of tax shelter.

Sanders has consistently touted the work he has done to preserve Vermont’s captive insurance industry on his Senate website, including linking to editorials that champion Vermont’s “attractive conditions” for housing it. Sanders is a longtime industry ally, according to a trade association representing Vermont captives. And local press have reported that he’s provided “strong backing” for the sector when it has faced scrutiny from federal regulators.

In one respect, Sanders’ support is a run of the mill bit of parochial politicking by a small state’s representative in Washington. But Sanders’ work on the industry's behalf also sticks out amid a record of consistent and vehement opposition to quirks in the tax code that allow corporations and wealthy individuals to minimize their payments to Uncle Sam.

His current campaign website calls for making “corporations pay their fair share of taxes by reversing Trump’s corporate tax breaks and closing corporate tax loopholes.”

Sanders has also run on raising the corporate tax rate to 35 percent—a burden that would likely offset much of the tax benefit that captives provide. And the Senator’s campaign defended his work for the industry by noting, in part, that his proposal for health care reform would render moot at least some captives set up as internal health insurers with which to provide employee benefits.

“If captive insurance companies are going to exist, we'd rather have them located in the State of Vermont where they are paying taxes, than in Bermuda or the Cayman Islands where they are not,” a campaign spokesperson said. “Furthermore, Medicare for All will eliminate the windfall profits in that industry.”

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The underlying tax policy at issue is complex. In essence, it permits corporations to set up their own insurance companies as subsidiaries. Captives are used for a variety of business purposes, but in general they're designed to protect against risks that are difficult or expensive to insure through more traditional policies purchased from third party insurers.

They can also offer a major tax benefit: companies that pay premiums to their own captives can deduct those premiums from their corporate tax bills, invest the captives’ reserves, and face taxes only on the resulting investment income. That, in turn, allows them to significantly reduce their tax burdens.

Captives “had a reasonable basis for being established when they were established,” according to Adam Looney, a Brookings Institute economist who previously served as a top tax policy official at the Treasury Department. “It has turned into a tax shelter because people are purchasing insurance for fictitious or exaggerated risks” in order to artificially inflate the amount of income companies can shield from tax collectors by steering to their captives.

The problem is egregious enough that the Internal Revenue Service named certain captive structures to its “Dirty Dozen tax scams” list in 2018. “These scams can range from simple schemes to inflate refunds to more elaborate efforts related to tax shelters,” the agency wrote.

A decade earlier, the IRS had set out to prevent the use of captives as tax shelters. It proposed a new regulation that would have barred companies from deducting the premiums they paid to their captives from the parent companies’ federal tax bills. The move drew heated opposition from the insurance industry, which said the proposed regulation would significantly hamper captive insurance in particular.

Also opposed to the move were all three members of Vermont’s congressional delegation: Democrats Rep. Peter Welch, Sen. Patrick Leahy, and Sanders, all of whom publicly rebuked the new rule. The IRS officially withdrew the proposal in February 2008.

At stake for the Vermont delegation was a thriving business sector in the state, which turned into an attractive domicile for captive insurance companies starting in the early 1980s. The state’s Agency of Commerce and Community Development boasts of Vermont’s friendly regulatory environment, a key draw for companies looking to set up captives, and its website even promotes the work of the Vermont Captive Insurance Association, a trade group that lobbies for the industry in Burlington and Washington.

The state “has been at the forefront of the captive insurance industry,” according to the agency. “Vermont provides all of the resources necessary for your captive to thrive. And, with unparalleled legislative support, you can be sure your captive is strong, secure, and supported at every turn.”

The state had 559 active captives with $194 billion of assets under management at the end of 2019, according to the agency. Inside Vermont, it had created an estimated 1,000 jobs, as of 2014. Some notable captives in the state include subsidiaries of defense contractor Northrop Grumman, British investment bank Barclays, Japanese automaker Toyota, and beleaguered financial services giant Wells Fargo—”the bank that defrauded millions of customers,” in Sanders’ telling, yet “was rewarded by the Trump tax giveaway with a $3.7 billion tax break.”

Vermont’s captive insurance industry also boasts some significant political muscle. The VCIA, the Burlington-based trade association, employs lobbyists in Washington that include former staffers of the House Financial Services Committee, the Senate Banking Committee, and the White House Office of Management and Budget. None of those staffers, it should be noted, previously worked for Sanders.

But the VCIA has lobbied Sanders directly. Just months before the IRS dropped its proposal to crack down on captive taxation, Sanders hosted the trade group in his office for a meeting and photo-op.

The good will persisted for years, and even translated into support for his presidential aspirations. “Bernie actually knows something about captive insurance and has been supportive of the industry here in Vermont for many, many years,” wrote VCIA president Rich Smith on the group’s website in February 2016, as Sanders battled Hillary Clinton for the Democratic presidential nomination.

“I must admit to a certain (yes, unrealistic!) fantasy should a Vermonter rise to the top,” Rich wrote of Sanders’ 2016 candidacy. “Clearly I have neither asked for a position in the administration nor have I been offered one, but since there are only so many people who live in Vermont, my resume would have to bubble up eventually, right??”

It’s rare to see such an affinity for Sanders from a corporate trade association, let alone one that has battled efforts to crack down on tax avoidance schemes. But Sanders isn’t the only populist Democrat with a soft spot for home-state industries.

Sen. Elizabeth Warren (D-MA), his 2020 rival, has found ways to work with her home state’s defense contractors even as she rails against the military industrial complex in the Senate. Another 2020 contender, former Vice President Joe Biden, has crafted an everyman image for himself even as he’s gone to bat for large credit card companies in his home state. Sen. Amy Klobuchar (D-MN) has pledged to stand up to the corrosive influence of big money in politics after taking huge donations from “the worst company in the world.”

Even in a Democratic presidential field that’s arguably as far left as any in the post-war period, Sanders stands out as the party’s most vehement critic of corporate America. But even Sanders is not immune to the parochial impulses of congressional representation, and in fact his support for Vermont’s favored tax avoidance scheme was taken for granted in Burlington. When a Vermont trade publication reported on a local coalition opposing the IRS’s 2008 crackdown on captives, it noted that coalition “not surprisingly” included Sanders.

The Senator’s office subsequently promoted that article on its website.

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