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Apr 1 2010

Obamacare and Unintended Consequences, I

C.M. Phippen

It is now estimated that in the first two quarters of 2010, $14 billion in writedowns could be taken as a result of changes in tax law contained in the new health care legislation. Stock prices have begun to fall, and Congress is in a huff.

Deere & Co. is estimating a $150 million charge this quarter, Caterpillar Inc. $100 million, AK Steel $31 million, AT&T $1 billion, Boeing $150 million, Lockheed Martin $96 million, and the list goes on and on.

The reason for the charges is that after the Medicare Part D prescription drug benefit was passed (another entitlement costing us many times more than estimated), companies that continued paying drug benefits for their retirees rather than dumping the responsibility onto the government, were given incentives for doing so. Not only did they receive a 28% subsidy, but they were allowed to deduct the cost of providing the coverage, including the portion paid by the government. Under the new law, this subsidy will no longer be deductible.

Those who support the closing of this “loophole” in the law argue that it’s only fair, as companies were receiving a double benefit. Sure, but they were paying costs that would be shouldered entirely by the federal government (taxpayer) if those companies failed to choose to provide the benefit in the first place.

Get it? Under the old law, taxpayers were still saving money. The result now is that either benefits will need to be reduced or those companies that will see an increased tax burden can simply choose to hire fewer workers or shift operations to other countries with more favorable tax laws.

“The change in the law is expected to affect primarily industrial companies with retirees represented by collective bargaining pacts, whose benefits are more difficult for companies to cut.”

According to the AFL-CIO on Dec. 10, eliminating the deduction “will be highly destabilizing for retirees who rely upon employer sponsored drug coverage” and “will impose a dramatic and immediate impact on company financial statements.”

The companies that will be receiving less beneficial tax treatment are the very types of companies many Americans, especially those who ostensibly supported this legislation, have complained about when they’ve chosen to move offshore in order to reduce production costs. Additionally, Congress was warned as early as December that these writedowns would need to occur.

The response of Einstein Commerce Secretary Gary Locke is truly mind-boggling. “During the past year, I have heard from CEOs from across the country that skyrocketing premiums are crippling the competitiveness of their companies. It is simply not responsible to suggest that the new health care law is bad for business.”

These CEOs wanted something done about skyrocketing premiums, so don’t you think they would have been ecstatic if that had actually happened? Much to the chagrin of the administration, this is not an ideological issue; rather, it’s an issue of good governance versus ramrodding through any garbage legislation just to say you did. Why did the administration choose to do everything except deal with the actual costs of health care when passing the current law?

This administration and Congress seem absolutely baffled that the universe is not heeding their decree of lower costs for all while covering more Americans and enabling, ultimately, more extensive health care coverage. It’s okay; at some point reality smacks all of us in the face, but for most of us it’s before we reach middle age and have “fundamentally transformed” America based on bad information and bad laws.

I had assumed that those who supported this bill fully understood that costs would increase but would be so supplemented by the taxpayer that many Americans wouldn’t notice, and would continue believing the rhetoric about cost savings to the country. Either I was wrong or the political games never end with these guys.

Congress now has issued letters to the CEOs of many of the companies who’ve reported such writedowns. Rather than reevaluate legislation they should have read and understood before passing, they’ve decided to harass those running companies which provide jobs to Americans. In case you’ve forgotten, the American worker is currently suffering under levels of unemployment not seen in decades; I’d think we’d be thanking them and asking how they can be accommodated to hire more of our citizens.

The week before passage of the bill, only 17% of Americans believed the plan would reduce the cost of care. Looks like 83% of us were forced to face reality long before our “leaders” in Washington.