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Eliminated Tax Subsidy Painted As Obamacare Cost

April 1, 2010 - by Eric Naing

(Correction, 4/1/10, 6:30 pm ET: this blog post originally referred to Caterpillar’s estimate of its costs as $100 billion. The correct figure is $100 million. OpenCongress regrets the error.)

The price of Obamacare is apparently sky-high, according to several corporations. Construction equipment manufacturer Caterpillar announced that the Affordable Care Act (H.R.3590) will cost the company $100 million. John Deere expects to lose $150 million and AT&T will take a $1 billion hit. In context, however, there’s less to these costs than meets the eye.

The Wall Street Journal last week described theses corporate losses as a “wholesale destruction of wealth and capital.” But what does this fiscal carnage really entail? For the answer we first have to go to President Bush’s Medicare Part D prescription drug law. The Wonk Room’s Igor Volsky points to the relevant provision:

The Medicare Part D legislation gives subsidizes of about $1,300 per retiree per year to businesses that provide prescription drugs to their retirees and permits companies to deduct the value of credit. Lawmakers hoped that the policy would prevent employers from ending their retiree drug plans and moving everyone into Medicare.

As a funding mechanism, the Affordable Care Act eliminates the ability of companies to deduct this subsidy:

SEC. 9012. ELIMINATION OF DEDUCTION FOR EXPENSES ALLOCABLE TO MEDICARE PART D SUBSIDY.

    (a) In General- Section 139A of the Internal Revenue Code of 1986 is amended by striking the second sentence.

    (b) Effective Date- The amendment made by this section shall apply to taxable years beginning after December 31, 2010.

Once again to clarify, the government pays businesses to provide their retirees with prescription drugs and then allows those businesses to deduct those government dollars from their taxes. The Affordable Care Act keeps the government subsidies in place but eliminates the tax provision. This is what the Wall Street Journal considers to be a “wholesale destruction of wealth and capital.”

It should also be noted that these $100 million to $1 billion in losses actually reflect projected and not immediate losses stemming from the elimination of a tax deduction as Kevin Drum explains:

[I]t turns out that corporations who qualify for this sweetheart deal accounted for it as a future addition to their earnings stream. Now the stream is gone — after 2013, anyway — so they have to reverse that accounting charge. It’s very sad. Still, there’s no actual money involved. No one has to write a check to anyone else. Corporations just have to add a footnote to their next quarterly report saying that the government has come to its senses and will no longer allow them to write off an expense that the government is paying for in the first place.

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