Health Insurance Reform Mythbuster: Claim of Double-taxing Big Business

Posted on by Karina

Since its passage last month, some opponents of health reform have claimed that the new law could adversely impact their corporations, pointing to the closing of a tax loophole in the bill to suggest reform is increasing health care costs.

MYTH: Health insurance reform will tax some corporations twice–causing them to stop offering retirees generous prescription drug benefits, or even cut back on hiring.

FACT: Health insurance reform closes a loophole that allowed corporations that offered prescription drug benefits to “double dip,” and deduct the taxpayer-financed subsidy for the drug benefit from their taxes. Under reform, the corporations still get the taxpayer help–just not the unfair tax break on it.

Secretary of Commerce Gary Locke explains:

The concern stems from a corporate loophole that was created as part of the Medicare Part D prescription drug bill that passed in 2004. Under that bill, businesses were provided a 28% subsidy to help cover the cost of providing prescription drug coverage to their retirees.

But a loophole in the law allowed businesses to deduct the value of that subsidy twice — they can exclude the 28% from their income and at the same time deduct the 28% from their income for tax purposes.

The health reform legislation closes this loophole by allowing businesses to deduct this money once rather than getting a double deduction on taxpayer dollars. These businesses will still get a generous subsidy to help them cover retiree prescription drug costs and they still get to exclude that benefit from their income — they just don't get a double deduction on taxpayer dollars.

The New York Times published an editorial today on the issue entitled, “We Call That Double-Dipping”:

Republican critics are continuing to pummel health care reform. Their newest charge is that the elimination of one generous tax deduction for retiree benefits would take such a bite out of corporate profits that companies may have to cut back on hiring, drop that retiree benefit, and shift added costs onto the taxpayer.

What is really going on? It is true that, starting in 2013, the new law eliminates a corporate tax advantage on retiree drug benefits that amounts to double-dipping.

It is also true that accounting rules require that the present value of the entire additional tax that companies will have to pay over the next several decades be put on the books now. That led AT&T to declare a charge of about $1 billion in the first quarter of 2010 and Verizon to declare $970 million.

Those look like staggering amounts until one understands that they don't require any immediate cash payments and that the added taxes will be paid out slowly — over perhaps 30, 40 or more years, depending on a company's retiree plan.

Wall Street certainly gave a collective yawn. Stock prices for the companies that made announcements barely budged (some went up), and analysts urged investors not to overreact because the accounting change would have a negligible impact on these companies' valuation, or market capitalization.

The affected companies have already profited from an inequitable provision in the 2003 Medicare prescription drug law. At the time, many employers were already providing drug coverage for their retirees. And to keep them from dropping that coverage, the new law provided doubly sweet subsidies to corporations.

For every $100 the company spends on retiree drug benefits, Medicare sends it a subsidy payment of $28. On top of that, the companies got a rare double tax break. The $28 subsidy is tax-free, and the company was allowed to deduct the entire $100 as a business expense.

The new health care reform law has left the 28 percent subsidy intact and continued to exempt it from taxation. But companies will no longer be allowed to deduct the subsidy as if it were an expenditure of their own.

That seems a reasonable way to generate a bit more revenue to pay for covering the uninsured. It also treats all employers equally instead of favoring profit-making firms with a special deduction that is of no value to nonprofit organizations, state and local governments, or firms that lose money.

The unanswered question is whether — as the critics charge — the change will push a lot of employers into dropping their retiree drug plans. The remaining tax subsidy is substantial and many companies and their workers value the retiree drug benefit, so defections may be small. If some retirees do lose their company drug benefits, they can buy government-subsidized coverage in Medicare that may be just or almost as good and will be getting better as health care reform progresses. Willing employers could also help subsidize their retirees' drug coverage in Medicare.

That's the least they should do in return for the generous tax benefits they have been receiving.

Later this month, the Energy and Commerce Subcommittee on Oversight and Investigations will hold a hearing on the impact of the new health reform law on large employers.

Caterpillar, AT&T, Verizon, and Deere have claimed that provisions in the new health care reform law, including closing the ‘double-dip’ loophole, could adversely affect their company’s ability to provide health insurance to their employees. Chairman Waxman and Subcommittee Chairman Stupak requested testimony from all four CEOs on their assertions in light of independent analyses showing that the law will expand coverage and bring down costs. Writing to Ivan Seidenberg, Chairman of the Board and CEO of Verizon Communications Inc, they say:

After the President signed the health care reform bill into law, your company told its employees that provisions in the law could adversely affect your ability to provide health insurance. A Verizon executive vice president sent an e-mail to all Verizon employees stating that “we expect that Verizon’s costs will increase in the short term” as a result of health care reform. Verizon also cautioned employees that “changes affecting the Part D subsidy will make it less valuable to employers, like Verizon, and as a result, may have significant implications for both retirees and employers.”

The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern. They also appear to conflict with independent analyses. The Congressional Budget Office has reported that companies that insure more than 50 employees would see a decrease of up to 3% in average premium costs per person by 2016. The Business Roundtable, an association of chief executive officers from leading U.S. companies, asserted in November 2009 that health care reform could reduce predicted health insurance cost trends for businesses by more than $3,000 per employee over the next ten years.

Continue reading the letters to the Chief Executive Officers»

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