LATimes: Reform bill exposes extraordinary tax subsidy

[Winehole23]

The healthcare reform law exposes an extraordinary tax subsidy

March 31, 2010 | 6:22 pm
Perhaps the very first effect of the new healthcare reform law was to cause a number of major corporations to restate their earnings -- dramatically so. AT&T announced a $1-billion charge. Deere & Co. and Caterpillar said they would take charges of $150 million and $100 million, respectively. And Boeing cut $150 million from its first-quarter earnings. That's because the so-called Patient Protection and Affordable Care Act eliminated a 4-year-old tax break for employers that provided prescription drug benefits to retirees. The tax break doesn't go away until 2013, but some companies felt compelled by securities law to report the hit to their earnings right away.


Some critics of the bill have pointed to the numbers as evidence of yet more of the bill's hidden costs to industry and the economy. But it's worth keeping them in perspective. Analysts at Credit Suisse predicted that the restatements would have minimal impact on company valuations, despite the fact that they would add up to a whopping $4.5 billion in lower earnings industrywide. Marie Leone of CFO magazine explains why:



Indeed, the "eye-popping" numbers being reported are not a good indication of the costs being incurred in the first quarter, notes [Credit Suisse] study co-author Christopher Cornett. That's because a quirk in the accounting rules requires companies to recognize the present value today of future cash costs going out as far as the drug benefits are offered. "So that's a big number," says Cornett. (Accounting rules mandate such current-period true-ups when tax-code changes require accounting adjustments to items that are already on the balance sheet, he explains. In most cases, an ongoing future cost would be recognized every quarter, year after year.)


UC Berkeley Economist Brad DeLong also points out that the tax break being eliminated was an extraordinary one to begin with. When Congress was working on a bill to add a prescription drug benefit to Medicare, some lawmakers worried that the new benefit would lead employers to eliminate the drug benefits that they had been providing retirees. So they agreed to reimburse employers for 28% of the cost of any plan that was at least as generous as the new Medicare benefit. That bit of corporate welfare was unusual in and of itself. But lawmakers also made the subsidies tax free, allowing employers to deduct the full cost of the benefit they provided -- even the part financed by the taxpayers.



By DeLong's calculation, that approach resulted in the government covering 63% of the price of retiree drug benefits at companies in the top tax bracket. The change will leave the government covering about 53%. As subsidies go, that's still pretty generous.


Nevertheless, you might argue that the reduction in the tax subsidy might lead fewer companies to provide these benefits, and it's better to have the government paying 63% of the bill than 100%. But that overlooks an important reality of the market. Companies don't agree to provide drug benefits to retirees out of the goodness of their hearts. They do it because employees (or more typically, their unions) demand them and are willing to accept lower wages, pensions or other forms of compensation as a trade-off. It's hard to see how such a small reduction in their employer's subsidy would affect their willingness to make that trade.


-- Jon Healey

[EVAY]

This does not surprise me. Not only do companies not provide benefits 'out of the kindness of their hearts', as stated in the article, they can use the current dust-up to do two things they want to do anyway; they can lower the benefits that they are offering and blame it on the government, thus reducing their operating costs and increasing their compe iveness for pricing, and in AT&T'a case, you can rest assured that there is lots more than 'health care costs' that are hidden in the write downs. Thus, they can clean up their balance sheets without being too transparent about it.

This is a great opportunity for the business community.

[MannyIsGod]

Just ing LOL @ that other thread now where these huge ing corps cry like little es and some of the resident idiots champion their defense.

Stockholm Syndrome at its finest.

[George Gervin's Afro]

thais is why these companies are going to lose the pr battle. the govt was paying a portion of their health care..and now the dead enders are defending their right to govt subsidies...priceless

[EVAY]

thais is why these companies are going to lose the pr battle. the govt was paying a portion of their health care..and now the dead enders are defending their right to govt subsidies...priceless

I think you are generally right about the PR situation, GGA. These guys are using this development for their own advantage, which is 'the American way', for sure, but I think they will be very uncomfortable if Waxman's committee really does question them about the 'subsidies' they were receiving before, and put it on television.

Having said that, if I were in their shoes in the face of this HC bill, I might have made very similar decisions, but I'll be damned if I would have made it so obvious regarding timing and publicity. They won't regret the business decision per se, but they will regret the attendant bad press...and Verizon and Sprint are gonna eat AT&T's lunch for them for the way it was handled.

The real losers in this are the AT&T employees and retirees who are gonna gt their coverages cut like crazy and have it all blamed on the HC bill. But, if they didn't know this was gonna happen beforehand, they should have. It was an issue in bargaining the last round with the unions, and it has been a retiree benefit issue for years.

[Wild Cobra]

I think they will be very uncomfortable if Waxman's committee really does question them about the 'subsidies' they were receiving before, and put it on television.

What subsidies. Explain please, and no. They will not be uncomfortable. They will chew congress a new asshole with the facts like the oil companies did.

The real losers in this are the AT&T employees and retirees who are gonna gt their coverages cut like crazy and have it all blamed on the HC bill. But, if they didn't know this was gonna happen beforehand, they should have. It was an issue in bargaining the last round with the unions, and it has been a retiree benefit issue for years.

What will happen is that the coverage prices will increase, even if the tax breaks stay in place. AT&T will likely pass on the added costs to their employees, and it's congress' fault. Not AT&T's.

[EVAY]

What subsidies. Explain please, and no. They will not be uncomfortable. They will chew congress a new asshole with the facts like the oil companies did.

What will happen is that the coverage prices will increase, even if the tax breaks stay in place. AT&T will likely pass on the added costs to their employees, and it's congress' fault. Not AT&T's.

WC, did you read the article? It says very clearly:

"When Congress was working on a bill (in 2003) to add a prescription drug benefit to Medicare some lawmakers worried that the new benefit would lead employers to eliminate the drug benefits that they had been providing retirees. So they (congress) agreed to reimburse empoyers for 28% of the cost of any plan that was at least as generous as the Medicare benefits."

If that is not a subsidy, WC, I cannot imagine what one would look like.

Think about this, WC, prior to 2003, AT&T was paying 100% of the prescription drug costs for some portion of its' retirees (not all of them got 100% coverage). After the medicare prescription drug 'reform' of the 2003, AT&T was paid by the government for 28% of the cost of a benefit they were already providing. It is a very direct subsidy.

Moreover, the "law also made the subsidies tax free, allowing the employers to deduct the full cost of the benefit they provided, - even the part financed by the taxpayers.

How is this NOT a subsidy in anyone's mind?

[EVAY]

What will happen now is that companies will stop offering prescription drug payment plans for retirees who are medicare-eligible, because the 'donut-hole' has been closed by the HC law, and there is no need for employers to fill that requirement.

[EVAY]

Health care insurance costs have been a huge cost for companies for decades, and companies started reducing coverages and increasing employee's contibution requirements in the late 80's as AIDS costs starting running through the systems, and HMO's began emerging as a way to control costs. This law will likely transfer a fair amount of that cost, at least for the retirees' portion, to the taxpayers, reducing costs for employers.

[EVAY]

Again, as the article makes clear, the size of the 'write downs' is a function of the accounting convention that allows costs that would have been incurred in years to come to be taken now in one lump sum, clearing the balance sheets for the future.

[George Gervin's Afro]

WC, did you read the article? It says very clearly:

"When Congress was working on a bill (in 2003) to add a prescription drug benefit to Medicare some lawmakers worried that the new benefit would lead employers to eliminate the drug benefits that they had been providing retirees. So they (congress) agreed to reimburse empoyers for 28% of the cost of any plan that was at least as generous as the Medicare benefits."

If that is not a subsidy, WC, I cannot imagine what one would look like.

Think about this, WC, prior to 2003, AT&T was paying 100% of the prescription drug costs for some portion of its' retirees (not all of them got 100% coverage). After the medicare prescription drug 'reform' of the 2003, AT&T was paid by the government for 28% of the cost of a benefit they were already providing. It is a very direct subsidy.

Moreover, the "law also made the subsidies tax free, allowing the employers to deduct the full cost of the benefit they provided, - even the part financed by the taxpayers.

How is this NOT a subsidy in anyone's mind?

he's consumed with lib s

[EVAY]

he's consumed with lib s

I'm nowhere close to a 'lib ', but I am unafraid to call a scam a scam, regardless of its origin.

[George Gervin's Afro]

What subsidies. Explain please, and no. They will not be uncomfortable. They will chew congress a new asshole with the facts like the oil companies did.

What will happen is that the coverage prices will increase, even if the tax breaks stay in place. AT&T will likely pass on the added costs to their employees, and it's congress' fault. Not AT&T's.

so it's congress' fault that they are taking way ATT&T's subsidy? The one where they have 28% of the tab paid by you.

Since when did you change your mind about govt subsidies?

[George Gervin's Afro]

I'm nowhere close to a 'lib ', but I am unafraid to call a scam a scam, regardless of its origin.

it is a scam but the resident dead enders will just repeat what they hear without realizing how stupid they look..

[ChumpDumper]

What subsidies. Explain please, and no. They will not be uncomfortable. They will chew congress a new asshole with the facts like the oil companies did.

"What subsidies"? The subsidies explained in the OP.

What will happen is that the coverage prices will increase, even if the tax breaks stay in place. AT&T will likely pass on the added costs to their employees, and it's congress' fault. Not AT&T's.

So you liked it better when you were paying for their health care. I'm sure they will still take a check from you.

[Wild Cobra]

"What subsidies"? The subsidies explained in the OP.

Hmmmm... Congress makes a better plan for prescription medications. To keep corporations from dropping their plans and having the retirees cost the government more, the government opted to pay $28 or every $100, instead on having new clients on the part D plan.

OK, I'll let you call that a subsidy. I thought you were calling the tax breaks a subsidy.

So you liked it better when you were paying for their health care. I'm sure they will still take a check from you.

You mean paying more in my costs to get the doctors paid from services rendered to those who cannot pay?

Sure. With what will become a zero deductible for these people will run up the health care costs far more than they are now.

[Wild Cobra]

What will happen now is that companies will stop offering prescription drug payment plans for retirees who are medicare-eligible, because the 'donut-hole' has been closed by the HC law, and there is no need for employers to fill that requirement.

Part of the master plan. Have to get everyone off the private plans, and move them to government plans.

[ChumpDumper]

I love the way you talk about anything but the subject at hand.

It certainly is easier for you to just make up.

[EVAY]

WC, you will let someone call a subsidy a subsidy? Wow.

I would not want to call that at ude arrogant. I wouldn't want to, but some people might.

Just as reasonable people might accuse your posts herein as purposely obtuse. Unreasonable people might call them something far worse.

[Wild Cobra]

WC, you will let someone call a subsidy a subsidy? Wow.

I would not want to call that at ude arrogant. I wouldn't want to, but some people might.

Just as reasonable people might accuse your posts herein as purposely obtuse. Unreasonable people might call them something far worse.

You just don't understand why I was reluctant. I didn't see that the government was actually kicking in 28% until I looked again. Yes, that is a subsidy. My problem is lib s repeatedly call tax breaks a subsidy. I saw it just like the 'boy who cried wolf.' Liberals constantly lie about what is and isn't a subsidy, I thought it was just happening again.

Maybe if your side would stop crying wolf, we would believe you when you say something true.

[ChumpDumper]

Now your inability to read is due to liberals.

Take some personal responsibility, WC. Pull yourself up by your own bootstraps.

[EVAY]

You just don't understand why I was reluctant. I didn't see that the government was actually kicking in 28% until I looked again. Yes, that is a subsidy. My problem is lib s repeatedly call tax breaks a subsidy. I saw it just like the 'boy who cried wolf.' Liberals constantly lie about what is and isn't a subsidy, I thought it was just happening again.

Maybe if your side would stop crying wolf, we would believe you when you say something true.

With all due respect, I don't think you can know my 'side'.

[RandomGuy]

I thought you were calling the tax breaks a subsidy.

Tax breaks are subsidies as well.

[TeyshaBlue]

Tax breaks are subsidies as well.

Exactly.

[RandomGuy]

You just don't understand why I was reluctant. I didn't see that the government was actually kicking in 28% until I looked again. Yes, that is a subsidy. My problem is lib s repeatedly call tax breaks a subsidy. I saw it just like the 'boy who cried wolf.' Liberals constantly lie about what is and isn't a subsidy, I thought it was just happening again.

Maybe if your side would stop crying wolf, we would believe you when you say something true.

In this case "lib " would include anybody who has taken basic microeconomics.

Two companies, identical financials.

Both have (EBIT) income of $100, a tax rate of 35%.

Company A's net income:
100-(.35*100)= $65

Company B's net income:
100-(.35*100)= $65

Goverment directly gives $5 to Company A, something you recognize as a subsidy, but a tax credit of $5 to Company B, something you seem to not recognize as a subsidy.

Let's re-examine the effect of the goverment action on their net income.

Both still have (EBIT) income of $100, and a tax rate of 35%.

Company A's net income:
100-(.35*100) + 5 = $70

Company B's net income:
100 - (.35*100-5) = $70

The economic effects are IDENTICAL. One must logically conclude that tax breaks, having the identical effect of a direct subsidy, are in fact subsidies.

Now let's assume that company A and B are compe ors in different countries, both members of the WTO.

The country that gives Company B the tax credit sues the goverment giving money to Company A under the WTO, arguing that the direct giving of money to company A is unfair, because that is a subsidy. The direct cash subsidy should stop.

Company A's country then argues in that court that the economic effects are indentical. One must logically conclude that tax breaks, having the identical effect of a direct subsidy, are in fact subsidies. The WTO should take no action.

Who wins the court case?