The healthcare reform law exposes an extraordinary tax subsidy
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
Thanks for providing an alternate view to the articles that only emphasize the size of the write-downs and present them as an ominous early result of health care reform. These companies have been enjoying exceptional government breaks for years.
Posted by: DKR | April 01, 2010 at 09:17 AM
While I agree that retirees may be willing to make that trade, I wonder how many other unforseen consequences are out there. There are several good provisions in this bill which I as a long time supporter of universal health care applaud. Overall however, this is a very poorly written bill that provides neither true universal health care nor true cost containment.
Posted by: Lizzie | April 01, 2010 at 09:53 AM
Well said, Lizzie. A comment that speaks the truth simply and rationally.
Posted by: C. Cohen | April 01, 2010 at 10:21 AM
This editorial is Exhibit A as to why I wont buy the LA Times.
This editorial is basically a position paper for the Obama White House.
I expect journalists to be inherently suspicious of anything that comes out of Washington. I expect journalists to pour over this massive bill and tell us how its language differs from what we have been told to expect. I expect journalists to be as non-partisan as possible.
On a larger scale I also expect columnists to be balanced across the political spectrum.
Posted by: madsircool | April 01, 2010 at 11:12 AM
First of all the writer says that the companies "...felt compelled..." to reduce the deferred asset recorded and it was a quirk in accounting principles that required the writedown. They felt compelled because generally accepted accounting principles require the adjustment (GAAP)and not making the adjustment would violate GAAP and the SEC rules. If not recorded at year end it would result in an auditors qualified report.
Next it was not a quirk in GAAP, it was intentionally stated that way to account properly for adjustments to long term liabilities to retired workers.
If you believe that these benefits will not be changed in the future, you are smoking pot. Companies will lower coverage to retirees, forcing them in the government run exchanges, driving up the cost to the taxpayers (for the majority of you that is the minority who pay for all of your government furnished benefits). I wish the majority of freeloaders good luck in finding a doctor in six years.
Posted by: Andy K | April 01, 2010 at 11:13 AM
@Andy K -- "Quirk" is your word, not mine. The point here was that the tax break itself was an outlandish bit of corporate welfare. As for the availability of the benefits in the future, the enactment of the Part D benefits posed the real threat, not the elimination one part of the subsidy (that is, the tax part).
Posted by: Jon Healey | April 01, 2010 at 12:57 PM
To all the people in the U.S. that don't want to participate in the new health care laws, I would suggest you sign a waver. You can opt out if you want, but will not be treated if you get sick.
Posted by: zman | April 01, 2010 at 04:50 PM
"this is a very poorly written bill that provides neither true universal health care nor true cost containment. "
- Exactly.
Posted by: AndreaU8 | April 01, 2010 at 05:08 PM
Thus begins the destruction of American business. If this health care nightmare continues, you will look back upon this day in the recession with fondness.
Posted by: Michael836 | April 01, 2010 at 11:06 PM
"A government big enough to give you everything you want is big enough to take away everything you have.” - Thomas Jefferson
Posted by: Mike March | April 01, 2010 at 11:16 PM
Beware the 'tax expenditure' logic that DeLong employs. If granting a deduction is an expenditure, it follows that taking that deduction away is a tax. And of course Obama-Biden team made a big deal about the Republican plan to 'tax your health care benefits'. Now look, they are 'taking your health care benefits' -- not just gold-plated plans, but run of the mill plans, by eliminating corporate deductions for providing these plans. Add to that the 'mandate' with its IRS enforcement arm , after Obama savaged Hilary during the primaries over her healthcare mandate. The conclusion-- the Obama-Axlerod team is deeply duplicitous. Democratic voters are deeply gullible.
Posted by: Mitchell Young | April 03, 2010 at 10:58 AM
Now look, they are 'taking your health care benefits' ->Now look, they are *taxing* your health care benefits.
Posted by: Mitchell Young | April 03, 2010 at 01:59 PM
@Mitchell -- Complaining about duplicity in this debate is a full-time job, I'm afraid. Let's stick to what's in the bill, not what people have been saying about it. Every economist I talked to, particularly the more conservative ones, likes the idea of reducing or eliminating the tax exemption for employee health benefits. It's politically sacrosanct, though, so it's amazing that Congress enacted something that's just one degree of separation away.
That's a different issue from this tax break, though. Here, the issue was trying to give employers even more incentive to continue doing something the labor market had been demanding that they do. It's a subsidy on top of a subsidy.
I'll agree, though, that eliminating a deduction is the same thing as raising taxes, if the expenditure can't be avoided. I think that's pretty clearly the case here.
Posted by: Jon Healey | April 03, 2010 at 04:15 PM
Jon, clearly what is going on here is raising the cost to businesses providing a benefit while at the same time lowering the value of that benefit to workers -- they now will have the option of getting the subsidy directly from the government, rather than from businesses. On the margin, this will need to unions de-emphasizing health coverage in their negotiations. (And its not like workers have a lot of leverage right now, you might have noticed the unemployment and underemployment numbers.) The net result could very well be that even the 37% subsidy kicked in by business will be diminished, and the corresponding amount transferred to the taxpayer.
Posted by: Mitchell Young | April 05, 2010 at 09:55 AM
a lot of the reason we have to always over pay for drugs and medical goods and services is because of the inequities and subsidies to certain favored classes (usually Giant Corporations), which distort any semblance of a "free market."
If we, once and for all, got rid of the huge expensive mess that is employer-provided healthcare, and we all got basic catastrophic (including powerfully negotiated rates for drugs and services) through a Medicare-type system, then we could all either elect to purchase additional "day to day" insurance for ourselves, or "comparison shop" for drugs and doctors, based on published prices and consumer reviews.
it's interesting that the right-wingers are the most opposed to this model of REAL free market healthcare, and prefer the convoluted, secret subsidies to Big Corpa and Big Insurance to simple, clean, fair pricing and availability. there is NO reason for employer-provided healthcare, or for secret corporate welfare. None.
Posted by: sheila | April 06, 2010 at 09:48 AM
The more that Congress micro-manages this and that which affects our daily lives...taxing this, subsidizing that, bailing out this...the darker the hole America is in becomes.
Economics is human action. No one person, or group of persons, has the knowledge required to divine the economic choices that individuals make many times a day. Government can certainly possess hubris and grandiosity, (as we well know) but can never possess the omniscience that would be required.
One civilization after the other has destroyed itself while trying.
Posted by: Tom_Jefferson | April 07, 2010 at 03:07 AM