Stein claims health care reform will eliminate “subsidy for drug costs”

Stein: “The health care [reform] requires them to have higher health care costs because they're not going to get a certain subsidy for drug costs.” During a Fox News discussion of one-time charges some corporations have announced, Stein asserted:

STEIN: The law is very clear. If a corporation incurs a cost or if something comes along that causes the corporation to have a higher cost, then the corporation must report it as a charge against income or a charge against capital. Clearly, what's happened in the health care requires them to have higher health care costs because they're not going to get a certain subsidy for drug costs. We don't need to go into the details of that. The law is clear. You must take a charge. The government is trying to McCarthyite them, to bully them, to thuggerize them into not taking this charge and to bear false witness. [Fox News' Cavuto on Business, 4/3/10]

Legislation does not eliminate subsidy -- it ends tax deduction on tax-free corporate subsidy

Legislation retains “subsidy for drug costs.” The health care reform legislation does not eliminate the tax-free special subsidy payments for companies that sponsor retiree prescription drug plans. The bill eliminates the ability of companies to take a tax deduction on that tax-free subsidy.

WSJ: “Companies will no longer be able to deduct the subsidy, but it remains tax-free.” In a March 26 article on the charges companies have taken, The Wall Street Journal reported that companies would retain a federal subsidy to purchase prescription drug coverage for retirees but that they would no longer be allowed the claim the subsidy as a tax deduction.

Locke: Tax deduction on tax-free subsidy 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.

On Cavuto on Business, Fortune's Gallagher said bill ends companies' “double dipping.” During the same panel discussion in which Stein falsely claimed that the health care bill ends the subsidy, Fortune magazine senior editor Leigh Gallagher noted that under previous law, companies were “sort of double dipping” and that their actual costs for the change are “not that much”:

GALLAGHER: What they're proposing is actually - it's not that much. This is a moderate loophole, and actually, what the companies were able to do is sort of double dipping. They were able to deduct both the cost and the subsidy that the government had given them in order to promote the coverage. So it's not that much. They're using scare tactics just as much as Congress.

NEIL CAVUTO (host): But, Leigh, it's a billion bucks for AT&T. It's almost a billion bucks for Verizon.

GALLAGHER: It is. But --

CAVUTO: And you're quite right. You're quite right to address it the way you did, but they did telegraph last summer that if you do take it away, we will have to, by your own Sarbanes-Oxley rules, announce that and take a charge for that. [Cavuto on Business, 4/3/10]