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D. Brad Wright

D. Brad Wright

Posted: April 12, 2010 10:57 AM

Big Business Bemoans Health Reform

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If you'll think back about a year-and-a-half ago, you might recall that big business--long a holdout on the issue--was finally speaking out in support of the urgent need for health reform. At the time, they were motivated to address the issue of rising costs that were unsustainable. That seems like as good a reason as any for for-profit enterprises to be concerned. After all, if you keep paying more and more for your employees to have health insurance, it does tend to cut into your margin. That's one reason why fixing our health care system is a critical component to fixing our economy for the long term.

Now, however, health reform has become law, and the businesses aren't so sure anymore. It turns out that they are having to change some of their accounting practices, and they are none too happy about it, because it means they have to begin taking smaller write-offs than they have been enjoying up until now. The whole thing centers around fixing a flaw in the Medicare Part D prescription drug coverage enacted during the Bush Administration. This piece of legislation did an important thing by extending drug coverage to seniors, but it did it in a bad way--lining the pockets of the pharmaceutical companies at the expense of taxpayers and a major increase to the deficit. In fact, this is exactly what Republicans are claiming Democrats have done with this latest reform. Requiring everyone to be insured doesn't make the system better, they argue, it just fattens up the wallets of the insurance companies. Republicans also claim that the Democrats "rammed" and "jammed" and "crammed" this legislation down Americans' throats with shady backroom deals. If we accept that as true, I'm not even sure what words would begin to describe the reckless, fiscally irresponsible, and ridiculously partisan manner in which the Republicans passed Part D. But I digress.

But this whole scenario does shed some important light on one thing: Democrats are simply restoring fiscal restraint to a law passed by Republicans that was largely a corporate giveaway masked by helping out the elderly, and the corporations aren't happy about it. Suzy Khimm puts it nicely:


"Under Medicare Part D, the government gave companies a 28 percent, tax-free subsidy to pay for their retirees' drug plan, but also let companies deduct the [full] amount from their income taxes. The health law continues the tax-free subsidy, but eliminates companies' ability to deduct it from their taxes in 2013. The changes prompted some companies to draw attention to the charges. AT&T recently reported that the accounting change would cost them $1 billion. Caterpillar reported $100 million, and other corporate giants have made similar announcements."

Another account with a pro-business angle is provided by the Wall Street Journal here.

So what's really going on? To put it simply, big business got a really sweet deal from Congress during the Bush years with the passage of Part D. Now, because that sweet deal is being taken away--because it is just one of many similar examples of inefficiency in our system--big business is whining about how unfair it is. Uwe Reinhardt uses an analogy to explain the whole thing in very clear terms:


"Consider [tax deductible] interest payments on mortgage loans made by homeowners who itemize their tax deductions. Suppose that last year a homeowner made all his monthly payments on the second year of a 20-year, fixed-rate mortgage loan [of about $300,000], which had an A.P.R. of 5 percent per year. Using a standard amortization table for such a mortgage, we find that a homeowner with this mortgage could deduct $14,338 in mortgage-interest payments for 2009 from his taxes.


Now suppose that for some reason, the government had decided to grant homeowners a 30 percent subsidy on that interest expenditure. Consequently, this homeowner gets a check for $4,301 from the government. What amount should that homeowner then be allowed to deduct from taxable income for 2009 -- the gross interest payment of $14,338 or the net interest payment of $10,037? If the former, the homeowner in effect could tax-deduct an expenditure that was actually made for him by the government. Would that be reasonable? Many people would say no."


So, to sum up, under previous Part D law, businesses got to deduct the full value of the benefits, including the government-funded subsidy. Under the new health reform law, businesses still get the subsidy, but that government support is not tax-deductible. When you look at the nuts-and-bolts of this issue, it's pretty clear that businesses shouldn't be able to get double the benefits by deducting the subsidy from their taxable income, but when you don't unearth the facts, all you hear is that "ObamaCare" is bad for businesses. The businesses are acting rationally to protect the favors bestowed upon them. The problem is, there's no good reason for them to have gotten such special treatment in the first place.


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