Wash. Times: In wake of health care bill, “major corporations have announced huge write downs because of increased costs”

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.

Provision corporations cited in write-downs is an “accounting adjustment” resulting from elimination of “double subsidy”

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.”

Klein: Medicare Part D change “isn't a new mandate or a hefty tax,” but rather eliminates companies' ability to deduct a “tax free” federal subsidy from their taxes. On March 29, Washington Post blogger Ezra Klein wrote:

What happened was this: When George W. Bush and the Republican Congress passed Medicare Part D in 2003, they were presented with a problem: The fact that the government was now offering prescription drug coverage might encourage these companies to dump the prescription drug coverage they were already offering employees. So Congress gave them a kickback: Companies that provide retiree drug benefits get a subsidy of about $1,300 per retiree per year in order to keep companies from ending their retiree drug plans at once and dumping everyone into Medicare. This subsidy is not just tax free but also tax deductible. Let me make sure that's clear: Not only did companies get a subsidy, but they could also deduct that subsidy from their taxes. Sweet deal.

This looked a bit nuts in retrospect, so Democrats ended the subsidy's deductibility. Again, let's be clear: They didn't end the subsidy. And they didn't make it taxable. They just said that it couldn't be used as a tax deduction.

NYT: “The federal government will continue providing” Medicare prescription drug subsidies to large corporations, which amount to “28 percent of a drug plan's costs.” In a March 29 article, The New York Times wrote:

When 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.

Under the health care overhaul, the federal government will continue providing those subsidies -- amounting to 28 percent of a drug plan's costs -- but companies will lose the tax break.

NY Times: Corporations reporting write-downs “because of the provision.” In the March 29 article, The New York Times reported that the American Benefits Council, which is “an association representing 300 large corporations” urged the “repeal” of the provision of the health care reform legislation which allowed for corporations to also deduct from their taxes the subsidies the federal government gave them to cover prescription drug benefits for their retirees. The Times noted that, for instance, AT&T had “announced ... that it was taking a $1 billion charge because of the provision. Deere & Company announced a $150 million charge, Caterpillar a $100 million charge, and 3M a $90 million charge.” The Times further reported that "[m]any companies said they were taking these charges now, before the current quarter ended, to comply with accounting rules. But some corporate critics asserted that the companies' rapid response to the health legislation was aimed at pressing the administration to repeal the provision."

WSJ: “Actual impact on cash flow is much less” than write-down Caterpillar announced; “closer to about $7 million a year.” A March 26 Wall Street Journal article explained that the “one-time charge” Caterpillar took “is a hefty number because the company is taking the impact right away of the future changes over the life of the retirees. But the actual impact on cash flow is much less.” The Journal reported that "[t]he loss of tax deductions for Caterpillar would be closer to about $7 million a year, or less than 1% of last year's profit of $895 million, based on a 35% corporate tax rate and the $20 million in annual subsidies that the company said it expected to receive in papers filed with the Securities and Exchange Commission."