The Wall Street Journal and The Washington Times have blasted the federal government for pursuing policies that amounted to "corporate welfare." However, these same media outlets have attacked the decision by President Obama and the Democratic Congress to eliminate a "highly unusual" tax provision that allowed companies to take a tax deduction on a tax-free government subsidy.
Right-wing media attack Obama for ending provision that gave corporations double tax subsidy
Washington Times: "Obamacare sticks companies with higher bills." From an April 2 Washington Times editorial, titled, "Obamacare sticks companies with higher bills":
Barely a week after Mr. Obama signed the government health care takeover, numerous major corporations have announced huge write downs because of increased costs. These adjustments reflect sudden unexpected increases over what these firms had previously budgeted to spend before Obamacare became the law of the land.
The amount of cash involved is huge. AT&T Inc. will write off a one-time charge of $1 billion in its first-quarter; John Deere faces $150 million; 3M $90 million; Caterpillar $100 million; Prudential $100 million; Valero Energy $20 million; and AK Steel $31 million. These companies represent a full range of industries, including financial, communications, manufacturing and energy.
Wall Street Journal: Health care bill "raise[s] taxes on companies" that provide retiree benefits. In a March 27 editorial, The Wall Street Journal called the health care bill a "wholesale destruction of wealth and capital" and misleadingly claimed that it "raise[s] taxes on companies that do the public service of offering prescription drug benefits to their retirees instead of dumping them into Medicare."
Provision at issue allowed companies to receive double subsidy for providing drug coverage
2003 Medicare prescription drug bill gave corporations a tax-free subsidy for retiree prescription drug benefits and also allowed companies to deduct that subsidy from their income taxes. In a March 29 article, The New York Times reported that "[w]hen Congress and President George W. Bush enacted a prescription drug plan for seniors in 2003, the legislation encouraged companies to continue providing prescription coverage to retirees, instead of shifting retirees to Medicare Part D, by having the government give those companies large subsidies for each retiree -- and also allowing them to deduct those subsidies from their income taxes."
Locke: "Businesses will still get the same 28% subsidy, and it will still be tax free. They just don't get to deduct the subsidy," which was "highly unusual treatment." In an April 1 Wall Street Journal op-ed, Commerce Secretary Gary Locke discussed the provision in the health care legislation, and called the actions corporations are taking in response an "accounting adjustment." As The New York Times recently reported, corporations cited the provision as a reason for announcing the write-downs. Locke wrote: "[C]ritics have seized on a minor provision in the law to suggest it's already increasing health-care costs for businesses. A fair reading of this provision suggests that its actual impact is quite modest." Locke continued:
Let's explain how this started. 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.
Reinhardt: Health care bill stops "allowing corporations to deduct from their taxable income an expenditure actually made by the general taxpayer." In an April 2 New York Times blog post, Princeton economics professor Uwe E. Reinhardt explained the change in law and the resulting corporate write-downs. Reinhardt noted that the Medicare Modernization Act of 2003 "in effect allow[ed] corporations to deduct from their taxable income an expenditure actually made by the general taxpayer." Reinhardt added:
Evidently the Obama administration and its allies in Congress disagree with that decision, for included in the recently passed health-reform bill is a provision allowing business firms to deduct only their net outlay on prescription drugs for retirees (Option A above -- $720 million in our illustration).
Under the rules of accounting (FASB ASC 740), this change in the law now forces companies to calculate the sum of the difference between (a) the larger projected tax savings under the Medicare Modernization Act and (b) the smaller tax savings under the current legislation. That sum then is deducted from the asset account "deferred tax assets," with a corresponding reduction in book net worth.
It is this accounting entry -- the required deduction from book net worth -- that The Wall Street Journal and like-minded critics of the current health reform bill appear to regard as a "wholesale destruction of wealth."
Previously, right-wing media decried corporate welfare
In 2008, Wash. Times lauded senators who voted against "corporate welfare" for auto companies. From a December 14, 2008, Washington Times editorial:
On Thursday, Senate Republicans could not come to terms with Democrats and the United Auto Workers (UAW) on specific aspects of the bill. Senate Republicans demanded that the UAW change its wage stance and make some concessions. As reported by The Washington Times, Republicans asked that the union set a date certain by which its members would have a lower pay scale, "one comparable to such manufacturers as Nissan and Volkswagen." The UAW refused to meet this requirement. Senate Republicans noted other problems with the bill, saying "it wasn't tough enough to change Detroit's business ways, didn't do enough to protect taxpayers and gave too much power to a 'car czar' to oversee the deal."
The bill failed to pass the Senate in a vote late on Thursday night, 52-35.
For listening to taxpayers who are weary of corporate welfare and voting against the auto bailout, members of the Senate who voted 'no' are the Nobles of the week.
In 2008, Wash. Times criticized TARP as corporate welfare. From an October 3, 2008, Washington Times editorial:
Both Barack Obama and John McCain voted for the bailout Wednesday night. That's not a big deal for Mr. Obama. He is a Democrat who supports earmarks -- in this case, it just happens to be corporate welfare. (Call this the progressive's version of "trickle-down economics.") For Mr. Obama, earmarks are par for the course of being a liberal.
Today, the House is expected to vote on the Senate bailout bill, and it will have the support of Democratic and Republican leaders -- as did the bill defeated Monday in the House. But the Senate bill is a travesty.
The pork-barrel politics the Senate handed the House now give Republicans and fiscal conservatives another reason to vote "nay."
In 2007, WSJ attacked Democratic Congress for supposedly presiding over "one of the biggest blowouts in corporate welfare history." From an October 23, 2007, Wall Street Journal editorial:
Perhaps you've heard that this is the Congress for "the little guy," the "forgotten" middle class, the working stiff. If that was the plan, it isn't working. On present trends, the 110th Congress will go down as one of the biggest blowouts in corporate welfare history.
That's saying something, considering that the last GOP Congress gave big business some $92 billion a year in subsidies, according to the Cato Institute. Cato's latest analysis indicates that if all the pending spending bills pass, corporate welfare will exceed $100 billion in direct outlays in 2008.
The handouts for the rich that have a good chance of passing include the most expensive farm bill ever; a rise in the mortgage limits on loans that can be securitized by Fannie Mae and Freddie Mac (see related article); some $2 billion in loan guarantees to ethanol producers; and expansions in flood and terrorism insurance to benefit home builders, mortgage banks, and real estate developers.