For much of the last decade, Massachusetts Democrat Richard Neal has banged away at proposals for vast tax increases on “offshore affiliated reinsurance”–coverage that insurance companies purchase from their own non-U.S. subsidiaries. As arcane as the issue sounds, the tax hike Neal wants could have vast negative consequences for the U.S. economy. If the proposal–introduced in the last Congress and likely to be reintroduced shortly–were to become law, it would create chaos in American insurance markets, stick consumers with over $10 billion in insurance rate hikes, create demand for massive new government property insurance programs, and start a trade war with the European Union.

Explaining how a narrowly targeted tax could have such major consequences requires some background on how reinsurance works. To begin with, all sizeable primary insurers–companies like State Farm and Allstate that sell products directly to consumers as well as companies like CNA and ACE that deal in commercial insurance–buy coverage of their own, reinsurance, to cover expenses after major catastrophes and diversify the types of risks they face. Reinsurance typically comes into play following expensive contingencies like hurricanes and billion-dollar liability payouts. Primary insurers almost always buy “affiliated” reinsurance, from a parent or sister company they can trust with information about their greatest liabilities and that won’t abandon them after a major loss.