Howard Dean is fond of criticizing politicians who provide tax breaks to
"large corporate interests," and one of his favorite campaign lines is a
blast at the Bush administration for doling out tax cuts to top executives
of Enron Corp.
But during Dean's 11 years as Vermont governor, he enacted tax breaks that
attracted to the state a "Who's Who" of corporate America -- including Enron
-- to set up insurance businesses. Indeed, Dean said in 2001 that he wanted
Vermont to "overtake Bermuda" as the "world's largest" haven for a segment
of the insurance industry known as "captives," which refers to firms that
help insure their parent companies.
With little notice then -- and barely any mention now in the Democratic
presidential campaign -- Dean succeeded in turning Vermont into the kingdom
of captives. Vermont has more of these companies than the other 49 states
combined. As part of the enticement, Dean led efforts to cut state taxes of
such companies, and he helped defeat a Clinton administration effort that
would have eliminated $100 million worth of federal tax deductions given to
But while the nearly 500 captive insurance companies have been a windfall
for Vermont -- providing 2 percent of the state's general funds from tax on
the $7 billion worth of premiums that go through Vermont annually -- the
industry also is highly controversial. Some analysts believe that while
Vermont profits, other states lose corporate tax revenues because of the way
a company's taxable income may be reduced if it uses captives.
"Dean apparently has no problems with tax havens as long as they are in the
state of Vermont," said University of Connecticut Law School professor
Richard Pomp, author of the textbook "State and Local Taxation." "He can't
have it both ways, because Vermont is acting like a little Bermuda."
In fact, Dean has often complained about Bermuda's tax haven status, saying
that the United States needs a president "who doesn't think that big
corporations who get tax cuts ought to be able to move their headquarters to
Dean spokesman Jay Carson said there is no contradiction between Dean's
complaints about President Bush's corporate tax breaks and the former
governor's own efforts to help the captive insurance industry. "This is a
legitimate industry, perfectly legal. It helped the economy here, and
Governor Dean is going to make no apologies for that," Carson said.
As governor, Dean saw his competitor for this business as Bermuda, which
hosts nearly three times as many captives as Vermont. "We consider our
competition to be Bermuda or the Cayman Islands," Dean said in a 2001
article published by the A.M. Best Co. "We feel pretty good about what we
are doing, but it is competitive. Our goal is to overtake Bermuda as the
world's largest captive domicile." Carson, the Dean spokesman, said
yesterday the governor was referring at the time to his desire to "bring
jobs and revenue back to the United States."
While the captive insurance industry began arriving in Vermont before Dean
began his 11-year term as governor, Dean heavily promoted the industry and
it grew dramatically under his administration into a key revenue source.
"In terms of benefits to the state, this is one of the crown jewels in the
state's tiara," said Lisa Ventriss, who until last year ran the Vermont
Captive Insurance Association and is now president of the Vermont Business
Roundtable. "There is maple syrup and skiing and cheddar cheese and captive
insurance. What more could you want from life?"
Molly Lambert, who served from 1998 to 2002 as commerce secretary under
Dean, said he played a key role in attracting captive insurance business.
"The governor would meet personally with captive owners when they came to
the state on many occasions," said Lambert, who now heads the Vermont
Captive Insurance Association. "If he knew the managers or owners would be
in town, they went to his office, or he went to them. He went to all the
association gatherings. The accessibility to the governor for the industry
has been just incredible."
The companies owning captives in Vermont range from Microsoft to Dupont to
Enron, according to a list provided by Vermont officials in response to a
request from the Globe.
As a presidential candidate, Dean has attacked Bush for giving tax breaks to
"Ken Lay and the boys who ran Enron." But Enron apparently was attracted to
Vermont because of the benefits offered under Dean's administration. Dean,
who became governor in 1991, cut taxes in 1993 by up to 60 percent on the
premiums paid by the parent companies to the captives at the same time he
was raising the state sales tax and cutting spending. Dean's tax cuts on
captives set off Vermont's boom in that industry.
In December 1994, Enron set up a captive insurance company called Gulf
Company Ltd., which is managed by USA Risk Group, a company in Montpelier
that specializes in managing captive insurance companies. Indicating the
closeness of a captive to its parent corporation, Enron's former chief
financial officer, Andrew Fastow, was on the Gulf board and made one
appearance at USA Risk's Montpelier office, a company official said. (Fastow
is no longer on the Gulf board, and Enron has filed for bankruptcy.)
Becky Aitchison, the account manager for Gulf Company Ltd., which is still
in operation, said that Enron created a captive insurance company in Vermont
as a way to make up for the high deductibles demanded by traditional
insurance companies. While she could not discuss the Enron specifics due to
a confidentiality agreement, she provided the hypothetical example of a
company that has a $1 million deductible on a traditional insurance policy
and decides to create a captive to be responsible for paying the $1 million.
The company would pay premiums to its own captive, which in turn could
invest the premiums, to generate more income. Under Vermont law, she said,
the premiums are subject to a top tax of 0.4 percent, but the profits on the
captive's investment of the premium are not subject to Vermont's corporate
income tax, which a state official said ranges from 7 percent to 9.7
Depending on how the captive was set up, such profits also might not be
subject to corporate taxes in the firm's home state, according to Pomp, the
University of Connecticut tax specialist. Moreover, the premiums paid by the
parent company to the captive might be deductible from federal taxes if the
entity is set up according to certain guidelines, which in turn could also
reduce a company's home-state taxable income. It is this potential for
diminished tax revenues in a company's home state that has led some analysts
to criticize the way captive insurance companies have become so popular in
Companies use captives instead of traditional insurance because of the tax
advantages, an inability to get insurance from traditional insurers, and a
reluctance to share the higher premiums that might be set due to a riskier
pool of client.
"If set up properly, they get deductions on the premium, they pay a low rate
on the premium in Vermont, and then they take their premiums and they invest
them and there is no further tax on them in Vermont or any other state, so
it is a triple whammy," said Pomp.
Leonard Crouse, Vermont's deputy commissioner of captive insurance, agreed
there may be cases in which the parent company pays less taxes in its home
state because the captive operation in Vermont reduces taxable income.
"That is true," Crouse said. "They pay less taxes, I'm sure, in those states
. . . Periodically you hear different states bringing that up." But he said
the tax situation was only one of many reasons that companies choose to set
up captive operations in Vermont, noting the state's friendly regulatory
climate and its staff of 20 employees devoted to serving the business.
In 1996, the Clinton administration tried to end the deductibility of some
captive premiums as part of its effort to reduce the federal deficit. The
measure, which would have imposed $100 million in federal taxes and might
have killed much of the US captive industry, was opposed by Dean, who wrote
a letter to President Clinton complaining that the idea was "bad public
policy," according to a 1996 article in Business Insurance.
The captive insurance industry is the type of clean, high-paying industry
sought by Vermont. The state receives $18.5 million in premium taxes and
licensing fees, amounting to about 2 percent of the state's general fund,
according to Daniel Towle, Vermont's financial services director. In the
most recent year, captive companies had deposited about $1 billion in
Vermont banks, and about $7 billion in premiums annually flow through
Vermont, Towle said. About 1,000 people are directly or indirectly employed
by the captive industry, and they earn two to three times the typical
Vermont wage, a state official said. Competition is on the horizon. Some
states, such as Arizona and Hawaii, have no tax on premiums, and the Vermont
Legislature this year lowered its premium tax by 5 percent and capped the
overall tax on any captive at $200,000 per year. Massachusetts has no
captive insurance companies, partly due to requirements for capitalization,
state officials said.
Michael Kranish can be reached at email@example.com.