## Retiree Health Benefit Subsidy Accounting: Megan McArdle Says That She Does Not Read the Wall Street Journal Editorial Page

Not that I don't understand why she doesn't--I don't read the WSJ editorial page either except under duress.

But isn't reading the WSJ editorial page part of her job?

McArdle:

Excessive Outrage on Retiree Subsidy Accounting: [T]he new health care plan changed the tax treatment of a subsidy for retiree prescription drug benefits, which caused those companies who had received the subsidy to announce a charge against their deferred tax assets.  Conservatives gleefully pointed out that this was probably going to change peoples' drug benefits.  Liberals leaped into the fray, arguing that all the law had done was 'closed a loophole", and accusing the companies of "double dipping". All this moralizing seems to me to be extremely overwrought.  (To be fair, I haven't actually seen any of the conservative moralizing; only liberal blogs claiming it exists.  Which is not to say that it doesn't, only that I don't read the frothier bits of the conservative blogosphere or media world where such moralizing might have been done...

I do like the description of the WSJ editorial page as one of the "frothier bits of the conservative blogosphere or media world" however: dead-on!

What is going on:

The Republican Bush administration's 2003 Medicare Part D established both a subsidy and a deduction for retiree health benefits:

• A company spends $100 on retiree health • The government kicks in$28 immediately
• The company then gets to deduct its entire $100 as a cost of business on its tax form--so if it is facing a 35% marginal rate its taxes go down by$35.

Thus the government is (for a 35% bracket corporation) kicking in $63 and shareholders are kicking in$37 of every $100 spent on retiree health benefits. The "normal" way to do this would be to have simply a subsidy: • A company spends$100 on retiree health
• The government kicks in $28 immediately • The company then deducts its$72 expenditure as a cost of business on its tax form--so if it is facing a 35% marginal rate its taxes go down by $25.20. And thus the "normal" way the$28 subsidy would mean that the government is kicking in $53.20 and shareholders are kicking in$46.80 of every \$100 spent on retiree health benefits.

This tax treatment is, to my knowledge, unique--I have never seen it before: the HIRE Tax Credit, the Research & Experimentation credit, and everything else I can think of all allows businesses to deduct only the net cost of the credit on their tax forms.

And the 2010 PPACA brings the tax treatment of this subsidy back into line with normal procedure.

Why did the Bush administration and the Republicans in 2003 do it this way? It smells like some last-minute lobbyist-induced slipping of the provision into the bill. It makes it a 40% subsidy, but the bill's managers can truthfully tell congressmen they are trying to get to vote for the thing that it is not a 40% but a 28% subsidy--and hope that they don't ask whether there is anything hinky about the tax treatment. It looks to me like just one of the hinky things done by the Republican Party in what was the hinkyest vote taken in the U.S. Congress ever:

Medicare Prescription Drug, Improvement, and Modernization Act (Part D): Legislative History: The bill was introduced in the House of Representatives early on June 25, 2003 as H.R. 1, sponsored by Speaker Dennis Hastert. All that day and the next the bill was debated, and it was apparent that the bill would be very divisive. In the early morning of June 27, a floor vote was taken. After the initial electronic vote, the count stood at 214 yeas, 218 nays. Three Republican representatives then changed their votes. One opponent of the bill, Ernest J. Istook, Jr. (R-OK-5), changed his vote to "present" upon being told that C.W. Bill Young (R-FL-10), who was absent due to a death in the family, would have voted "aye" if he had been present. Next, Republicans Butch Otter (ID-1) and Jo Ann Emerson (MO-8) switched their vote to "aye" under pressure from the party leadership. The bill passed by one vote, 216-215. On June 26, the Senate passed its version of the bill, 76-21. The bills were unified in conference, and on November 21, the bill came back to the House for approval.