An End to Corporate Double-Dipping?

With passage of the health reform bill, a number of public corporations are taking charges against future earnings because they are losing a tax deduction that they received when they accepted federal subsidies for providing prescription drug benefits to retirees.  This gift from American taxpayers, has been provided since the Medicare Part D drug benefit was enacted in 2003.  

Under that law, passed by a Republican controlled Congress and signed by President George W. Bush, corporations that provide prescription drug benefits to retirees are eligible to receive a federal subsidy of up to $1,330 per retiree.  And, in tax treatment that only a (Republican?) Congress could invent, the $1,330 per retiree subsidy was not treated as income to the corporation, and therefore taxable.  It was treated as an expense of the corporation, and therefore tax deductible, making the benefit worth even more to the corporation, while reducing tax revenue for Federal and state governments.

So, in 2003, Congress charged the entire Medicare Part D program to the Federal national debt, provided subsidies to corporations that provided a drug benefit to retirees similar to that provided under Medicare Part D, but allowed the subsidy they provided to the corporation to be a deductible expense, rather than a taxable income stream.  Since the health benefits provided by corporations are already tax deductible, this provision allowed a  tax deduction on the subsidy provided by federal taxpayers.  So the corporation was given federal money to help it pay for its health plan's prescription benefit for retirees, it was also allowed to deduct as a business expense, the money it received from taxpayers, and used to buy prescription medicine.  It is a little like winning the lottery, and being able to take a tax deduction on the value of your winnings.  

Under the new health reform legislation, beginning in 2013, corporations will continue to receive the subsidy, but will lose the ability to take a tax deduction for the subsidy.  As a result, corporations like AT&T, Caterpillar and Deere and Company have already announced charges against future earnings.  By eliminating the ability of corporations to take tax deductions on subsidies provided by taxpayers, the new health reform law will raise some revenue and rationalize tax treatment of these corporate transfer payments.