Reader Question – Isn't this killing businesses?

First off, sorry for the absence.  I was on vacation with the family.  If you followed me on Twitter, you’d know that already.

A number of you have been writing me gleefully with the new talking point against the Affordable Care Act.  It’s going to kill businesses, cost them a fortune.  How much?

On top of AT&T’s $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.

Ironically, I haven’t been hearing this nearly as much from conservative politicians as I am from the WSJ.  IT may be because this argument isn’t nearly as powerful as it looks at first glance.

Sure, those are big numbers.  But they seem way to big to be an instant tax.  Why did no one complain before?  Here’s a likely answer:

When the Medicare Part D prescription drug bill passed in 2003, businesses were given a double subsidy to help cover the cost of providing prescription drug coverage to their retirees. The government picked up 28% of the cost of their retiree prescription drug plans, and businesses were allowed to both exclude that 28% subsidy from their income and at the same time deduct that subsidy from their income for tax purposes.

In 2013, that changes. Under the new law, businesses will still get the same 28% subsidy, and it will still be tax free. They just don’t get to deduct the subsidy.

Seems reasonable, right? This is how virtually every other federal subsidy for businesses and individuals is treated by the IRS. Indeed, Donald Marron, acting CBO director for President George W. Bush, put it this way: “[A]s the Joint Committee on Taxation recently noted, that treatment is highly unusual. In my view, it’s right that the recent health legislation closed that loophole.”

This change has garnered recent headlines because, to comply with accounting laws, companies affected by the provision have taken a one-time charge reflecting the loss of future tax deductions over the decades-long duration of their retiree health-care plans. Critics have seized on this accounting adjustment to suggest these costs—as much as $1 billion in one company’s case—are going to place immediate and substantial cost burdens on America’s businesses.

This is disingenuous.

The actual cash flow impact of these provisions begins in 2013, and is only a tiny fraction of the accounting charge-offs.

This newspaper reported last Friday that while one company calculated a $100 million hit to its first-quarter earnings, its actual cost after taxes and subsidies, beginning in 2013, was closer to $7 million a year, or less than 1% of its profits last year.

Credit Suisse’s response to the tax controversy was: “don’t overreact to the hit on earnings.” Morgan Stanley referred to it as “noise” that would have “no impact whatsoever” on their view of this earnings cycle. And UBS projected that the impact in virtually all cases represented less than 1% of market capitalization for affected companies.

First, this is an elimination of a case of double-dipping.  For-profit corporations were getting to deduct an expense they weren’t paying for.  So…  that’s not really fair.  Not only that, they were showing this as a future way to profit.  When the Act closed the double-dipping, they had to adjust their future earnings downward.  They didn’t have to write  a check or pay a tax.  They just had to show that they could not show this as a way to make extra money on your dime.  Your taxes paid for that double-dipping.  I’m not happy about that.  Why are you?

Then, they went and made it look worse.  They took the changes over decades and added them all into one large number.  So the “$100 million” hit is really closer to “$7 million a year”.  And, it doesn’t even start until 2013.

Yes, businesses are taking a small hit.  They are losing a loophole that let them double-dip and make extra money with taxpayers’ money.  No longer.  And, they are getting lots of new benefits as well.

There is likely a reason that Republicans aren’t making a huge deal out of this one.

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