North Carolina-based companies Progress Energy and Goodrich are echoing claims made by AT&T, Verizon, John Deere, and Caterpillar that a provision in the Patient Protection and Affordable Care Act—the health care bill signed into law by President Obama—is going to cost them millions of dollars over the coming years.
The two telecom providers and the two equipment makers were among the large U.S. companies that caused a stir in March when they announced their bottom lines would suffer because the health care law would change the tax treatment of federal subsidies companies receive for providing prescription drug coverage to retirees.
Tax Change Hurts Earnings
To comply with Securities and Exchange Commission reporting requirements, the companies announced to shareholders that reducing the subsidy would cost them more than $1.5 billion overall and they would take a non-cash charge against their earnings in the current quarter.
When Congress passed a Medicare prescription drug benefit in 2003, it offered to subsidize businesses that already provided the benefit, to keep them from dumping their employees into the new government program. The subsidy is 28 percent of the cost of the benefit.
Until now, the subsidy was tax-free and also could be deducted from a company’s taxable income. Under the new legislation, it no longer will be deductible.
Millions in One-Time Charges
Progress Energy spokesman Mike Hughes said the Raleigh-based utility plans to account for a onetime charge of $20-25 million when the tax first is collected in 2013.
Charlotte-based Goodrich Corporation, a global supplier of aerospace and defense systems, issued a press release warning investors of a similar onetime charge of $10 million. Vice President Lisa Bottle said Goodrich is “watching and waiting” to see what other effects the legislation will have on the company’s earnings.
A spokeswoman for another Raleigh-based Fortune 500 company, Martin Marietta Materials, a producer of aggregate and other construction materials, said some of its employees receive the prescription drug benefit, but she wasn’t allowed to say how many or what the tax change would cost.
As for BB&T, the banking company headquartered in Winston-Salem, spokeswoman Cynthia Williams would not confirm whether the bank provided the prescription drug benefit and whether the bank would suffer other financial impacts from the new health care regime.
“It’s too early for us to know. We’re still assessing the impact,” Williams said.
According to Williams, BB&T was in its “quiet period” — the four-week period before companies release their quarterly earnings reports; during that interval, the SEC requires them to remain silent on any information that could affect stock prices.
Ramifications Still Unclear
Duke Energy spokesman Tom Williams criticized other companies for making “premature” projections about their earnings.
“Some companies have gotten out ahead of things, in our view, and announced impacts based on guidance that may or may not be correct from the IRS,” Williams said.
Duke provides a retiree prescription drug plan, but Williams said he didn’t know whether it was subsidized or not, and its new status under Obama’s law remains unclear.
“At this point we don’t know what the costs will be. We’re waiting for additional guidance from IRS and the U.S. Treasury,” Williams said. “We’ll have a sense about that included in our next earnings report.”
Naïveté From Waxman and White House
White House Spokeswoman Moira Mack had no comment in response to this story other than providing a link to a statement from Secretary of Commerce Gary Locke and a blog post from White House Communications Director Dan Pfieffer. Neither denies the legislation will raise costs for corporations. Rather, they suggest corporations have been getting away with something, and that the new law will close the loophole that allowed them to do it. Pfeiffer referred to the tax-exempt, tax-deductible status of the prescription drug subsidy as “double-dipping,” citing the headline from a New York Times editorial.
In late March, Congressional Democrats, led by House Energy and Commerce Committee Chairman Henry Waxman (D-CA), launched an investigation of the companies that made public the initial revelations of expected losses thanks to this tax change and others within the health care legislation.
Initially, Waxman threatened to compel CEOs from the companies projecting losses to testify at a Washington hearing. By late April, he had canceled the hearing and reversed course.
“The companies acted properly and in accordance with accounting standards in submitting filings to the SEC in March and April.… [T]hese one-time charges were required by applicable accounting rules,” Waxman’s office stated in a public memo.
Joe Coletti, director of fiscal and health policy studies at the North Carolina-based John Locke Foundation, said he’ll be interested to see if any of the companies decide to drop the benefit altogether, rather than give up a portion of the subsidy. Ending the benefit would transfer more retirees into Medicare, raising the cost to the taxpayers.
According to Coletti, the White House and Waxman’s office should have expected this result from the new law.
“Call it what you will,” said Coletti, “it’s a cost that businesses must account for.”
Sara Burrows ([email protected]) is associate editor of Carolina Journal, published by the John Locke Foundation in Raleigh, N.C., where an earlier version of this article appeared. Reprinted with permission.
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