Friday, March 26, 2010

AP finally reads the health care bill....I mean law. Update: AT&T to take $1 B writedown

Someone at the Associated Press finally read the health care bill, and discovered that all the talk about eliminating the "doughnut hole" in the Medicare prescription benefits overshadowed the truth that up to 2 million retirees could be forced from the prescription drug coverage provided by their former employees, leaving them the only option of enrolling in Medicare's program:
The health care overhaul will cost U.S. companies billions and make them more likely to drop prescription drug coverage for retirees because of a change in how the government subsidizes those benefits.

In the first two days after the law was signed, three major companies — Deere & Co., Caterpillar Inc. and Valero Energy — said they expect to take a total hit of $265 million to account for smaller tax deductions in the future.

With more than 3,500 companies now getting the tax break as an incentive to keep providing coverage, others are almost certain to announce similar cost increases in the weeks ahead as they sort out the impact of the change. [snip]

When Congress approved the Medicare prescription drug program in 2003, it included government incentives for employers to provide drug benefits to retirees so the public system wouldn't be overwhelmed. Employers that provide prescription drug benefits for retirees can receive subsidies covering 28 percent of eligible costs; those subsidies totaled $3.7 billion in 2008.

Under the 2003 law, companies could deduct the entire amount they spent on the drug benefits from their taxable income — including the government subsidy, an average of $665 per retiree.

The health care law signed by President Barack Obama on Tuesday prohibits companies from writing off the subsidies starting in 2011, meaning they will no longer be able to deduct them from their taxable income.

For example, if a company spent $100 on benefits, including a $28 government subsidy, it could write off the full $100 on its taxes under the old rules. The new rules would allow the same company to write off only $72.
This is what Ed Morrissey at Hot Air calls the "dangers of static tax analysis."  He explains:
Over the past year, I’ve repeatedly warned about the dangers of static tax analysis. That process considers changes in tax policy without considering its impact on behavior. The closure of this “loophole,” as Robert Gibbs called it yesterday, is a perfect example of this stunted thinking.

The Democrats in Congress argued that they would gain $5.4 billion in revenue by eliminating the tax break enacted in the 2003 Medicare Part D program as an incentive for businesses to keep their retirees out of the Medicare system. Instead, they have given businesses a reason to dump their retirees out of the private networks and into the Part D system now. Not only will the expected tax revenues never appear, but now we will have to spend a lot more money covering those prescriptions out of public funds. The seniors in these programs will suffer most of all, as the Part D coverage is vastly inferior to the private plans offered by businesses in the private sector.
Ed hits the nail on the head as usual, but he is entirely too kind with his delicate description.  I call it the "dangers of allowing ideologues and lobbyists who have never signed the front of a paycheck or balanced a budget to write 'transformational' legislation."

Update:  AT&T announced this afternoon that it will take a $1 billion non-cash expense in the first quarter due to the newly passed health care law.

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