Wednesday, March 31, 2010

Helping Henry Waxman understand (T)

In light of Henry Waxman's April 21st CEO inquisition, the WSJ explained the recent uproar by the Obama Administration and Congress over company earnings write-downs related to the healthcare bill.

Before getting to Waxman, here is a quote from the AFL-CIO's December letter letter warning about the consequences of the healthcare bill's tax treatments.  And the AFL-CIO is a HUGE Democrat money source - it's not as if this came from people opposed to the healthcare bill:

It is clear that in drafting Section 9012, the Senate was not aware of, and therefore not able to
take into consideration, the significant negative impact, required under Financial Account
Standard No. 109, on the financial statements of companies currently providing retiree drug
coverage. Regardless of the effective date of the provision, accounting rules dictate that
immediately upon being signed into law, this deferred tax liability would have to be reflected on
company financial statements. This would substantially increase liabilities for the very
companies providing the most comprehensive coverage to current and future retirees. In the
current economic environment, this would be particularly ill-advised and disruptive.

Poor Henry is confused, because he was told by "independent analysts" that the healthcare bill would reduce costs.  Now that companies are following accounting laws that REQUIRE them to take an asset impairment charge in light of higher future taxes on retiree benefits, he thinks they're playing politics.

 As the WSJ explains, the write-downs relate to closing the "loophole" in which companies get a tax subsidy for proving retirees with prescription drug benefits:

Presumably the White House is familiar with the Financial Standard Accounting Board's 1990 statement No. 106, which requires businesses to immediately restate their earnings in light of their expected future retiree health liabilities. AT&T, Deere & Co., AK Steel, Prudential and Caterpillar, among others, are simply reporting the corporate costs of the Democratic decision to raise taxes on retiree drug benefits to finance ObamaCare.
When the Medicare prescription drug plan was debated in 2003, many feared that companies already offering such coverage would cash out and dump the costs on government. So Congress created a modest subsidy, equal to 28% of the cost of these plans for seniors who would otherwise enroll in Medicare. This subsidy is tax-free, and companies used to be allowed to deduct the full cost of the benefit from their corporate income taxes (beyond the 72% employer portion).

As explained by one of the offenders, AT&T, in their 10k:

"We recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized."
That sounds innocuous enough, but apparently the reality of accounting laws rubbed the White House the wrong way.  According to the WSJ: 

A White House staffer told the American Spectator that "These are Republican CEOs who are trying to embarrass the President and Democrats in general. Where do you hear about this stuff? The Wall Street Journal editorial page and conservative Web sites. No one else picked up on this but you guys. It's BS." (We called the White House for elaboration but got no response.)
In other words, CEOs who must abide by U.S. accounting laws under pain of SEC sanction, and who warned about such writedowns for months, are merely trying to ruin President Obama's moment of glory. Sure.

Here is part of Waxman's laughable letter to AT&T CEO Randall Stephenson, in which Waxman says "The New Law is designed to expand coverage and bring down costs, so your assertions are a matter of concern."

Copyright 2010 AlphaNinja

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