It didn't take long once the health-care reform bill was all but a certainty before the Usual Suspects here (in comments) and across the Cheddarsphere (1 2 3 4 5 6 7 8--I probably missed some) started braying that Corporate America was going to feel a pretty severe sting based on changes to the tax code contained in the HCR package. Earth-mover industry giant Caterpillar, for example, claimed it would have to fork over $100 million in just the first year based on this new bill. Or so commenters and bloggers claimed.
It seemed fishy to me at the time, but I didn't have the chance to go through and figure out exactly what it meant. But the other day apparently the Wall Street Journal--Corporate America's Official Spokesperson--ran an editorial rehashing the claims:
Yesterday AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses. [. . .]First of all, these are write-downs. Write-downs are, of course, different from normal expenses or regular write-offs; write-downs indicate the reduced future value of an asset. To be clear: These companies are not claiming gigantic new tax losses; they are saying some asset will be worth less in the future than they thought.
Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden. Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.
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.
So what asset are these companies writing down? Ezra Klein explains:
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.The asset that these companies are writing down is free money from the feds. That's right--starting in 2004, the feds (read: taxpayers) began giving these companies free money to spend on their retirees' drug costs. And until this week, these companies also got to deduct the value of that free money from their taxes when they spent it.
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.
Or, to put it yet another way: The new law demands that corporations pay taxes on the tax money we give them so that we don't spend tax money on pills for their retirees. Confusing? A little. But is this really something that conservative critics of the law ought to be hyping to the extent that they are? The fact that an essentially new (since 2004) corporate giveaway has lost its tax-deductible status?
When conservatives blog that ATT or Caterpillar will lose millions or billions because of "Obamacare," yeah, that sounds scary. But the truth--that these bloggers are defending not just tax giveaways to corporations but a loophole that lets those corporations double-deduct the giveaway--should shame those conservative bloggers.