BUSINESS
05/31/2010 05:12 am ET | Updated May 25, 2011

Big Business, GOP Complain That Health Reform Slashes Corporate Welfare

The Republican Party and major corporations have joined forces in the first major rearguard attack on health care reform, charging that the cost of complying with "Obamacare" is resulting in hundreds of millions of dollars in added business expenses.

The crime that reform is guilty of: Slashing corporate welfare.

Under the previous system, major corporations were subsidized by the government to provide prescription drug coverage to their retired employees. At the same time, corporations could claim on their tax returns that it was they -- not the taxpayers -- who paid for the drug coverage, and could write the expense off as a tax deduction.

Health care reform cuts out that fat. The corporations still get taxpayer money to help pay for their drug coverage, but they can no longer continue the fiction that they're using their own money to do it.

Being forced to operate on a diet of leaner corporate welfare benefits will make U.S. companies less able to compete, Republicans argue. Removing the benefit will also force large corporations to compete on a level -- or at least closer to level -- playing field with small businesses, who don't get the subsidy. The charge-offs play into the line that Republicans are pushing -- namely that health care reform is a "job killer."

So far, Boeing, AT&T, AK Steel, 3M, Caterpillar, Deere, Prudential and Valero Energy have all said that reform is forcing them to take significant charge-offs on their balance sheet. The welfare cuts don't go into effect for several years, but accounting rules require the reduction to be taken in the year the law is passed.

"A jobs narrative is emerging in the wake of the CAT, John Deere, Verizon (and many other) announcements as it is becoming clear that the health care bill is having an immediate and negative effect on the economy," said Ken Spain, spokesman for the National Republican Congressional Committee. "In short, the bill is a job-killer."

The NRCC is hitting Democrats in their home districts with each announcement. Four Illinois companies, including Illinois Tool Works, took significant losses "thanks to Democrats like Bill Foster and Debbie Halvorson, who supported the government takeover of healthcare," reads one standard GOP press release.

Democrats are pushing back, demanding that the companies come to Congress to explain their announcements. Energy and Commerce Committee Chairman Henry Waxman (D-Calif.), and Rep. Bart Stupak (D-Mich.), chair of the oversight subcommittee, wrote to AT&T. "The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern," they wrote.

The Chamber of Commerce shot right back. Thomas Donohue, the organization's president and chief executive, said that Democrats are trying to shift the blame.

"They are searching for a way to blame these businesses for a mess that the lawmakers themselves have made," he wrote in a letter to board members.

But the underlying issue seems fairly simple: Corporate welfare is being cut to help fund an expansion of health care coverage.

UPDATE: The welfare in question originated with the 2003 prescription drug bill signed into law by President Bush after it passed a GOP-controlled Congress in the early morning, following a three-hour vote that was held open while leaders hunted down vote-switchers.

The program entitled corporations to a government subsidy covering 28 percent of the prescription drug benefit for their retirees. The companies were not required to count the taxpayer money as income. (Unemployment benefits, meanwhile, are taxed as income.) Companies were also allowed to claim the entire cost of the benefit as a write-off, even the part paid for by the government.

It's an unusually generous entitlement. When corporations get subsidies for research or for hiring new workers, for instance, they can't write-off the subsidy as if they were spending their own money.

The entitlement isn't removed until 2013.

Wall Street analysts say that the eye-popping charge-offs that are being reported are more smoke than fire. "Don't overreact to the hit to earnings," David Zion, a research analyst for Credit Suisse, said in a note to investors.

The size of the accounting reductions being announced is so large, analysts said, because they project out the benefit from the current subsidy for 30 years, rising with health care's current inflation rate, and then crams it all back into a one-quarter loss. First quarter profits will be reduced, but there will be no long-term impact on the companies' financial health, the AP reported.

AT&T's charge-off was reported as a billion dollars, but the actual cost of revoking the subsidy for one year will be $40 million, according to background information provided by the White House.

A White House aide also said that AT&T CEO Randall Stephenson and Larry Summers spoke Wednesday about the charge-off. Stephenson told Summers that AT&T's hit could represent as much as ten percent of the entire impact of the cut in corporate welfare, because the company has so many retirees.

The day of the announcement, AT&T's stock price rose slightly.