The truth about the AT&T's "charge" and GOP's intellectual poverty

Back in the 1980s, the great tax-cutter Ronald Reagan raised taxes on unemployment benefits. The Patron Saint of GOP economic policy also shamelessly decided that your social security benefits should be taxed if you had any other income. Last year, Obama and the Democratic Congress provided relief on the first $2,400 of unemployment benefits. The Recovery Act delivered numerous tax cuts to the middle class. Health care reform adds up to the largest middle class tax cut for health insurance ever. But hey, don't look at the evidence. Parrot after me: the terrible horrible no good very bad socialist communist Democrats want to raise your taxes!

Now, the Republicans have a new complaint against the Democrats, President Obama and the landmark health care bill: they're stopping corporations from claiming a tax break on the money the taxpayers give them!

Republicans latched right onto the latest news of AT&T taking a $1 billion charge in this quarter due to some closing of tax loopholes in the health care bill. You see, prior to the health care bill becoming law, corporations could exploit a loophole in the law for retiree prescription medication coverage:
When the Medicare prescription drug program was passed in 2003, it included a provision granting employers a subsidy of 28%, or up to $1,330, per retiree for prescription drug costs.

Even though the federal subsidies were already tax free, employers could still write them off on their income taxes, in addition to writing off their own contribution. The new law, signed by Obama on Tuesday, maintains the subsidy as a tax-free incentive to employers, but prohibits them from taking it as a deduction.
In other words, Republicans are mad because the health reform law stops a corporation from claiming a tax exemption on the money that never had a tax on to begin with. Let me illustrate it this way. Let's assume a corporation paid $1,000 per retired employee on average on prescription drug costs. Because Medicare Part D does not have to carry that cost, the federal government writes this corporation a check for $280 (or takes it off their taxes otherwise). So for a retiree's benefit, the corporation itself is really paying $720. Under old law, the corporation would be able to still claim a tax break on the entire $1,000, even though only $720 of it is actually its expense. Under health reform, the corporation can still claim an exemption on the $720, but not the $280 that came from taxpayers in the first place.

If the expense for an employee was $5,000 instead, similarly, the corporation will be able to claim tax exemption on $3,670, but not the $1,330 (at which it's capped) for which taxpayers paid in the first place! In other words, the new law makes it so that corporations can still claim a tax exemption on their own expenses, but not on the expenditure made by taxpayers.

If videos do it better for you than numbers, you got it. White House Senior advisor Valerie Jarrett explain this in short, and she also reminds us of the obvious: the benefits of health reform to businesses far outstrip its costs.



Oh no, the outrage! How dare we not let corporations claim tax exemptions on money they didn't even spend to begin with?

Let's also put this into perspective just a little bit. Subsidies corporations got for retiree prescription drug coverage totaled $3.7 billion in 2008, which companies providing coverage will continue to receive.  Collectively, they may at best have to pay $1.3 billion extra in taxes (assuming a high corporate tax rate of 35%) because they won't be able to take a tax exemption for $3.7 billion they received from the government.

AT&T says it will take a $1 billion charge due to it having to pay a fairer share of its taxes - meaning, essentially, that it would have to pay taxes on $1 billion more of its earnings than it would have to otherwise. AT&T made $31 billion in revenues in the fourth quarter of 2009, and $123 billion in revenues in all of 2009. By way of comparison, in that same quarter (Q4, 2009), AT&T:
  • spent over $8 billion in sales, administrative and advertising expenses.
  • claimed over $5 billion in depreciation and amortization costs.
  • paid $800 million in interest expenses to its creditors.
The company also ended 2009 with $268 billion in assets. I do not give these statistics to speak ill of AT&T. They haven't whined about this so far, as far as I can tell. It's the Republican leadership that have been crying a river over this. This is merely to point out that AT&T's ability to do business or expand its business is not exactly contingent upon them being able to claim tax exemptions on money given to them by taxpayers.

A fear has been that retirees of companies like AT&T might lose prescription drug coverage because of this. First of all, that's doubtful, given that a majority of AT&T's workforce is represented by the Communication Workers of America, who has a retirement contract in place that runs through 2012. By then, a 50% discount will be in place for the Medicare Part D prescription coverage gap (beneficiaries will pay no more than 25% of drug costs by 2020).

What Republicans also conveniently ignore is the following help any business, including AT&T, will get through a temporary re-insurance program for covering early retirees thanks to the health reform law:
The program reimburses participating employment-based plans for 80 percent of the cost of benefits provided per enrollee in excess of $15,000 and below $90,000. The plans are required to use the funds to lower costs borne directly by participants and beneficiaries, and the program incentivizes plans to implement programs and procedures to better manage chronic conditions.
But hey, why bother looking at the benefits and full implications of a transformational legislation when you can just scream about taxes at the top of your lung?

In conclusion, here is the Republican philosophy on taxes, summed up: the middle class and the poor should pay taxes on benefits they have paid into and earned, but big business should be able to claim tax exemption on money that they don't even spend. Fiscal hawks? Well, more like a fiscal jackal.