Tuesday, April 06, 2010

ObamaCare is Taxing

The White House and the Writedowns

The administration wants companies to ignore known costs and book speculative future savings. That's Enron accounting. Commerce Secretary Gary Locke had it backwards last week when he cited the "hype and overheated rhetoric" of U.S. corporations that have reported large writedowns in response to health-care reform.

In fact, the companies' accounting announcements were written in the most bland prose imaginable. It was the Obama administration that created the controversy by suggesting that these legally required filings were politically motivated. Mr. Locke himself publicly criticized the companies for being "premature" in making these disclosures, even though rules enforced by the Securities and Exchange Commission require immediate disclosure.

The new health-care law contains two sentences that change the tax treatment of a subsidy originally crafted in 2003 when Congress established the Medicare prescription drug program.

As a result, companies must now impose on their financial statements the present value of their entire new future tax liability. The Obama administration's position is a) that the original tax provision was actually a "loophole," and b) that companies are acting irresponsibly by refusing to acknowledge the overall cost savings associated with the new law.

As to the first charge, some historical context is helpful. In 2003 Congress considered enacting either a larger, taxable subsidy or a smaller, nontaxable one. From both the perspective of the federal government and the companies receiving the subsidy, the real economic impact would have been identical either way. For reasons that entirely served the federal government's peculiar accounting methods, Democratic and Republican lawmakers agreed to the smaller non-taxable subsidy.

Notwithstanding the unusual tax treatment in the original provision, the bottom line is indisputable: The subsidy exists for the express purpose of saving the government money by keeping retirees on company prescription drug plans rather than having them enroll in the Medicare drug plan. Now that Congress has reversed the policy, corporations must report eye-popping charges on their financial statements.

As for the government's assertion that companies are failing to adequately account for all the savings they will enjoy from health-care reform, isn't that exactly the kind of "creative" accounting that got Enron in trouble? Even assuming the administration is right that the various features of the new law will reduce future health costs, it would be highly inappropriate for companies to try to book these speculative future savings.

And if companies did so, wouldn't accuracy dictate that they also take a charge for all of the new law's provisions that could add to health-care costs? Fortunately, accounting rules have meaning because they require reporting things that are known (like the new tax on the drug subsidy) rather than things that are either hoped for or feared but may never come to pass.

The real story here—and the one that is getting little attention—is that the new law will likely result in a change of drug coverage for 1.5 million to two million retirees as they are moved from their employer-sponsored plans, according to a study we commissioned by former Office of Management and Budget official Don Moran. Reasonable people can differ as to whether shifting retirees to the Medicare drug program is good or bad policy. But two things are certain. First, it will cost the federal government more money. Second, employers will be excoriated when it happens.

When an administration is unwilling to accept criticism of two sentences in a 2,700-page law there is a problem. The White House needs to stop being so defensive. Here's a new talking point for Press Secretary Robert Gibbs to try: "Overall, we are very proud of the sweeping legislation we have enacted. But we acknowledge that the drug-subsidy provision is having unintended, negative consequences for companies, and potentially also for retirees and government costs."

Short of admitting that they were repeatedly warned this would happen, the administration and the Democratic leadership in Congress might at least stop accusing companies of hype and inflated rhetoric.

Labels: ,


Post a Comment

<< Home