CART Act of 2025

Bill Number

H.R. 1481

Origin Chamber

House

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Introduced

Latest Action

2025-02-21: Referred to the Committee on Ways and Means, and in addition to the Committee on the Judiciary, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

Last Updated

2025-05-07T14:12:27Z

AI-Generated Summary

Purpose of the Legislation

The Catastrophic Risk Transfer Act of 2025 (CART Act) amends the Internal Revenue Code of 1986 to create a special tax framework for "catastrophic risk transfer companies." These are specialized insurers designed to handle large, low-probability losses from disasters (like hurricanes or earthquakes). The goal is to encourage their formation and capitalization, ensuring they have enough funds to cover massive insurance claims and stabilize the insurance market.

Key Provisions

• Definition of Catastrophic Risk Transfer Company (CART Company): A domestic corporation licensed as a "special purpose insurer" under state law. Its main activities include issuing equity or debt securities (to raise capital), holding safe investments (like cash or high-quality bonds), and entering insurance or reinsurance contracts for catastrophic risks. These risks involve rare but high-cost events exceeding $25 million in direct insurance or pooled mortality/longevity risks. Contracts must be with unrelated parties and fully backed by collateral (assets set aside to pay claims).
• Qualification Requirements: The company must elect this status with the IRS. At least 90% of its income must come from qualified investments (e.g., interest from cash or bonds) or premiums from regulated insurers, governments, large companies (assets over $100 million), or big risk pools. If it fails the income test due to reasonable cause, it can disclose details and pay a penalty tax on excess income.
• Taxation of CART Companies: Taxed like regular corporations on "CART taxable income" (adjusted to exclude certain deductions like net operating losses but allow a full deduction for dividends paid if at least 90% of income is distributed). No accumulated earnings are allowed (must distribute to avoid tax). Special deductions for operational expenses (e.g., actuaries, lawyers, rating agencies). Dividends can be declared late and treated as paid in the prior year if distributed timely.
• Taxation of Security Holders (Investors): Dividends are "looked through" – taxed based on the company's underlying income types (e.g., interest, capital gains, premiums). Companies must report these breakdowns to investors. Exempts qualified investment income dividends from withholding taxes for non-U.S. persons (with exceptions, like if tied to the recipient's own debt).
• Special Rules for Structures: Allows "series" issuances (separate pools of assets/securities for specific risks) to be treated as distinct companies for tax purposes. Includes procedures to retroactively qualify if earnings rules are violated, with interest penalties but no fraud exceptions.
• State Taxation Limits: States cannot tax reinsurance premiums paid to CART companies (to avoid double taxation). If taxed, the rate cannot exceed federal excise taxes on foreign reinsurers.

Significant Changes to Existing Law

• Adds a new Part V to Subchapter M of the Internal Revenue Code (alongside rules for real estate investment trusts and regulated investment companies), introducing a tailored tax regime for catastrophe-focused insurers – unlike general insurers under Subchapter L.
• Exempts certain dividends from withholding taxes on nonresident aliens and foreign corporations (amending sections 871 and 881), making U.S. catastrophe securities more attractive to global investors.
• Caps state premium taxes on CART reinsurance, overriding potential multi-state taxation and aligning with federal foreign reinsurer rules (section 4371).

Potential Impacts

• Government Agencies: The IRS gains new administrative duties (e.g., elections, disclosures, penalty taxes), while state insurance commissioners must license and oversee these entities. Could reduce federal tax revenue short-term by encouraging distributions but stabilize disaster relief costs long-term.
• Citizens: Improves access to affordable catastrophe insurance by enabling better reinsurance, potentially lowering premiums for homeowners in disaster-prone areas (e.g., coastal states). Investors (including individuals) benefit from pass-through taxation on dividends.
• International Relations: Attracts foreign capital to U.S. insurance markets via tax exemptions, fostering global reinsurance partnerships without increasing U.S. tax burdens on non-U.S. investors.

Main Stakeholders Affected

• CART Companies and Investors: Primary beneficiaries through favorable taxation, easier capital raising, and pass-through dividend treatment.
• Insurance and Reinsurance Firms: Can offload catastrophic risks more efficiently, reducing their capital needs.
• State Regulators and Governments: Gain tools to license these entities but face limits on taxing premiums; states with disaster risks (e.g., Florida, California) may see market stability.
• U.S. Taxpayers and Businesses: Indirectly affected via enhanced insurance availability; large companies (over $100 million in assets) can buy coverage more easily.
• Foreign Investors: Exemptions encourage participation, broadening the investor base.

Notable Legal, Constitutional, or Political Implications

• Legal: Creates a new tax entity type with anti-abuse rules (e.g., relatedness tests, collateral requirements) to prevent misuse as a tax shelter. Borrowed procedures from REIT deficiency rules ensure compliance flexibility. Potential for litigation over "reasonable cause" failures or state tax challenges.
• Constitutional: No direct issues; aligns with Congress's taxing power (Article I, Section 8) and federal preemption of state taxes in interstate commerce.
• Political: Addresses rising catastrophe costs from climate change, promoting private-sector solutions over federal bailouts (e.g., post-Hurricane Katrina). Bipartisan sponsorship (introduced by Reps. LaHood and Himes) signals broad support for insurance resilience, but could face debate over tax incentives favoring investors.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Rep. LaHood, Darin [R-IL-16]

Cosponsors (2)

Rep. Himes, James A. [D-CT-4], Rep. Pettersen, Brittany [D-CO-7]

Recent Actions

• 2025-02-21: Referred to the Committee on Ways and Means, and in addition to the Committee on the Judiciary, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.
• 2025-02-21: Referred to the Committee on Ways and Means, and in addition to the Committee on the Judiciary, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.
• 2025-02-21: Introduced in House
• 2025-02-21: Introduced in House

Bill Versions

• Catastrophic Risk Transfer Act of 2025 — issued 2025-02-21 — PDF (24 pages)