Some large corporations publicly projected nine-figure losses over a decade from President Obama’s health care reform. In response, Chairman Henry Waxman has summoned these chief executive officers before his Energy and Commerce Committee.
Republicans trumpet the write-downs as a condemnation of Obamacare. Democrats say the law closes a “loophole” and the businesses are being disingenuous.
It’s a tangled web we weave when big-government plans we conceive.
The twisted tale begins in the heyday of Big Government-Big Business collusion, Franklin Roosevelt’s War Industries Board, a government-enforced anti-competitive cartel. While the WIB set strict wage controls, it allowed companies to compete for talent with fringe benefits, like health insurance.
Like wages, fringe benefits are tax deductible for employers. If a company spends $2,000 for a worker or retiree’s prescription drug plan, the company’s taxable income decreases $2,000.
The next strand in the web was spun in the rush to regulate after Enron’s collapse. Section 409 of Sarbanes-Oxley required companies to “disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition” of the company. This codified an element of the Generally Accepted Accounting Principles.
The GOP Congress, shunting its limited government principles, spun the third strand: the Medicare prescription drug entitlement. With government subsidizing prescription drugs for seniors, employers had less reason to pay for their retirees’ drugs: It’s like buying your workers ice cream on Free Cone Day.
To prevent employers from unloading retirees onto government, Republicans offered a big carrot: Washington would pay for 28 percent of the drug benefit companies give their retirees. This Retiree Drug Subsidy, averaging about $665 per capita, would not be subject to taxes.
Strand four: health care reform. The Obamacare raises taxes on the RDS. The subsidy check is still untaxed, but companies can no longer deduct the full cost of their drug benefit expenses — only the 72 percent that comes out of the company’s pocket, not the 28 percent Uncle Sam was subsidizing.
There’s some logic here: if your company reimbursed you for half of a work-related dinner, you couldn’t write off the entire tab.
But in another light, this tax change is absurd: Reducing an employer’s tax deduction by $665 is exactly the same thing as taxing a $665 subsidy. In the words of Atlantic economics blogger Megan McArdle, “there’s not much point in giving someone a subsidy, and then taxing it back, unless you just like doing extra paperwork.”
This tax increase adds up for big companies. GAAP and Sarbanes-Oxley require the companies to state, immediately, how the tax increase will hurt profits.
So the companies are not “complaining” about the tax increase — they’re filing federally mandated public statements. For this sin, Waxman has called the CEOs to the principal’s office.
Democrats misleadingly call this tax incease, “closing a loophole,” as if the tax exemption and full deductibility were unintentional. The Medicare drug bill was written explicitly to ensure these subsidies would be untaxed.
But there’s something unseemly about Republicans objecting to Democrats’ shrinking a subsidy. Not too long ago, Republicans spoke of eliminating corporate welfare.
However, the Retiree Drug Subsidy is not pointless corporate welfare — given the boondoggle of Medicare Part D, the subsidy actually curbs federal spending by bribing companies not to stick Uncle Sam with the tab. So, this tax increase may in fact add to the deficit by pushing companies to offload their retirees — another way in which Obamacare’s claim of deficit reduction is a farce.
There are no good guys in this story. The bad guys are the Republicans who made a new entitlement for drugs, and Waxman who menaces companies for making Democratic legislation look bad.
The moral: Sticking government hands into the economy — through new subsidies, taxes, and regulations — creates bad situations where there are no right answers.
Timothy P. Carney is the Washington Examiner‘s lobbying editor. His K Street column appears on Wednesdays.
