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aceventura3 · 03-25-2010, 07:41 AM

Actions have consequences.

Currently there are many US companies (that have been in the business of making things for years, responsible for creating a booming middle class, etc.) that have been supplementing their retiree benefits with an enhanced prescription drug plan as compared to Medicare. These companies have been able to take a tax deduction for this cost, decreasing the net obligation of Medicare and it has been giving millions of retirees a better benefit. A win, win, win, the companies were doing a good thing, getting a deduction, saving Medicare some money and benefiting millions of retirees.

Under the new health care plan, the deduction goes away.

The government is expecting increased taxes collected to help pay for the plan and they have assumed no negative consequences.

Here are a few of the things we may expect:

*Profitability of these companies declines, net worth of investors decline, corporate taxes collected goes down, capital gains taxes goes down.
*These companies become less competitive internationally, costing jobs and further eroding our manufacturing base.
*These companies discontinue the program, causing millions to lose a valuable benefit, increasing the burden on Medicare, and reducing the taxes collected.

Those who believed the CBO scoring, bought into pure fantasy. CBO can not account for these kinds of consequences outside of the direct language in the legislation.

Quote:

March 25 (Bloomberg) -- Caterpillar Inc. lobbied to keep the U.S. from taxing a subsidy on retiree drug benefits. It lost the battle when President Barack Obama signed an almost $1 trillion health-care overhaul into law this week.

The world’s largest maker of bulldozers put a price tag on that defeat yesterday: a $100 million charge to earnings.

Disclosures by Caterpillar and AK Steel Holding Corp. in the two days since the signing are the first sets of health-care charges that ultimately may shave as much as $14 billion from U.S. corporate profits, according to an estimate by benefits consultancy Towers Watson. Caterpillar Chief Financial Officer David Burritt and nine peers laid out objections in a Dec. 11 letter as Congress was drafting the bill, saying they would have to account for the tax change as soon as it became law.

“This could be a huge hit for bigger companies,” said Roland McDevitt, health-care research director in Arlington, Virginia, for New York-based Towers Watson. “This will be the kind of charge that will get the CFO looking and asking what are we doing here?”

Investors should expect hundreds of charge announcements in the next few weeks as the first quarter ends and companies release earnings, said Ken Sperling, leader of Hewitt Associates’ Global Health Care group in Lincolnshire, Illinois.

Deere & Co., the world’s largest maker of farm machinery, today said the new law will increase expenses by about $150 million after taxes in the fiscal year that runs through October.

3,500 Employers

About 3,500 employers provided prescription drug coverage to 6.3 million retirees nationwide who qualified for a federal subsidy in 2008, McDevitt said.

The change in tax treatment shouldn’t affect retirees, said Linda Douglass, a White House spokeswoman for health care.

“Firms will continue getting support for providing this benefit and generally are offering continuing prescription drug coverage as part of a compensation package,” Douglass said. “We expect that they will continue to do so.”

The retiree drug subsidy is paid to companies that provide coverage for prescriptions to former workers who would otherwise be on a Medicare Part D plan. The average subsidy amounts to about $665 per plan member. Under prior law, the federal payment to companies was tax-exempt.

The new law would require companies to “immediately account for the present value of this tax increase,” cutting earnings, Caterpillar’s Burritt and CFOs of nine other companies including Boeing Co., Verizon Communications Inc. and freight hauler Con-Way Inc. told U.S. Speaker of House Nancy Pelosi and Senate Majority Leader Harry Reid in their December letter.

‘Weren’t Successful’

“We weren’t successful,” Randal Mullett, San Mateo, California-based Con-Way’s vice president of government relations, said in an interview about the letter signed by CFO Stephen Bruffett. “This is one of the things in the health-care bill that takes place very quickly.”

AK Steel was first out of the gate after Obama signed the law on March 23, announcing a $31 million first-quarter non-cash charge within hours. The third-largest U.S. steelmaker by sales is based in West Chester, Ohio.

The prospect of losing the tax benefit elicited no sympathy from one supporter of the health-care overhaul. “The question is why was something made tax-free in the first place?” said Senator Jay Rockefeller, a West Virginia Democrat.

Employers may decide to stop offering the drug benefits, rather than pay the tax, said James Klein, president of the Washington-based American Benefits Council. The trade association represents companies that administer retirement and health plans covering more than 100 million Americans.

Reviewing Drug Benefits

New York-based Verizon, the second-largest U.S. phone company, told employees in a note shortly after the law was signed that the tax will make the subsidy less valuable to employers like Verizon and so “may have significant implications for both retirees and employers.” Spokesman Peter Thonis declined to comment beyond the text of the note.

Caterpillar is also reviewing the benefits and the new tax “could cause us to consider changes to the retiree prescription drug benefit,” spokesman Jim Dugan said in an interview. “We haven’t made any decisions.”

Boeing, another signer of the December letter, is “taking a look at the law and we don’t have any changes planned at this time,” spokesman Chaz Bickers said. The world’s second-largest commercial-plane maker is based in Chicago.

Honeywell International Inc., the Morris Township, New Jersey-based maker of controls for aircraft an buildings, said in a January regulatory filing that it saw a “potential negative 4 cents to 5 cents per-share impact” from the legislation. Honeywell is still reviewing the law and will keep monitoring the situation, spokesman Rob Ferris said.

‘Legacy Costs’

“This will mostly impact older companies with legacy costs,” said Jeffrey Sprague, whose firm Vertical Research Partners LLC follows multi-industry and electrical equipment companies. He estimates Honeywell’s possible cost at about $42 million after tax.

If enough companies drop the benefit, it may jeopardize the $4.5 billion in revenue that the tax was projected to generate and shove 1.5 million to 2 million retirees off of employer-sponsored plans to Medicare, raising government costs, said the American Benefit Council’s Klein.

Ford Motor Co. Chief Financial Officer Lewis Booth said he is still assessing the law’s effect on the automaker’s costs.

“I’m neutral,” Booth said in an interview yesterday. “Until I’ve priced it out, I won’t have any basis as CFO to say I’m positive or negative.”

Companies that plan to continue the benefit will have to report the tax liability as a non-cash charge in the first quarter, when the law was signed, said Sperling, of Hewitt Associates. Approximately one-third of large U.S. companies now offer the benefits to retirees, he said.

“You’re going to see a flood of these in the next couple weeks,” Sperling said of the charges.

Obama Tax?s $14 Billion Charge Starts at Caterpillar (Update1) - Bloomberg.com

This legislation is loaded with unintended consequences and "hidden" costs (not really hidden for those who actually look into the details), there was never an honest and open debate on the details.