FP: U.S. faces possible US$52B tax hike, Cost of doing business in US set to rise
Jonathan Ratner, Financial Post
Not only is the cost of doing business in the United States set to rise with the passing of Barack Obama's health-care reform bill, but the expense for taxpayers may also be higher than anticipated. With an additional 32 million Americans expected to eventually receive health insurance coverage, much of the price tag will be paid by businesses.
The U.S. Chamber of Commerce, which criticized the bill for saddling an already burdened corporate America with additional costs, noted that it will lead to US$52-billion in new taxes on companies as a result of the requirement that more employees be covered by insurance. At the same time, the organization said the legislation creates 16,500 new jobs in the Internal Revenue Service.
"The House made a wrong and unfortunate decision that ignores the will of the American people," said Thomas Donohue, the Chamber's chief executive. "It will drive up health-care costs and make coverage less affordable for businesses and families.... It will further expand entitlements and explode the deficit, and raises taxes by a half a trillion dollars at the worst possible time."
Average health-care costs for U.S. employers increased 7.3% in 2009, bringing average net payments for active employees to US$3,341. The spike in health-care spending exceeded the rate of inflation, which fell 0.4% last year. It also topped overall U.S. health-care costs, which rose 4.8%, according to data from Thomson Reuters.
This comes at a difficult time for U.S. companies, which are struggling to cope with the worst economic downturn in decades. Construction equipment giant Caterpillar Inc., for example, estimates its insurance costs will rise by US$100-million, or 20%, in the first year alone.
"We can ill-afford cost increases that place us at a disadvantage versus our global competitors," Gregory Folley, the company's vice-president and chief human resources officer, said in a recent letter to House leaders. "We are disappointed that efforts at reform have not addressed the cost concerns we've raised throughout the year."
One of those global competitors could be Canada, which has long had lower health-care costs than the United States.
"From a pure cost perspective, it is an extra tax for the United States that does not get levied on Canada," said Eric Lascelles, chief economics and rates strategist with TD Securities. However, he has a mixed view on the competitive impact of the healthcare reforms given that they will take years to be implemented.
"There are certain advantages the United States will accrue as a consequence of this," Mr. Lascelles added, noting that both labour mobility and overall health outcomes should improve. "One of the huge distortions in the U.S. labour market is that people who have someone with a serious illness in their household often are unable to change jobs because they would be unable to get insurance at the new company."
As a result, one possible scenario could see very little near-term impact, followed by an advantage for Canadian businesses in the subsequent three to 10 years as their U.S. counterparts get hit with additional taxes. Longer term, the playing field would more likely be evened out due to the existence of a more universal form of health care in the United States.
Most key provisions of the healthcare reform bill do not take effect until 2014. Meantime, the regulations that govern these changes will need to be drafted. There will also be two election cycles before then, which could affect what is ultimately implemented.
Business will not be alone paying, so will taxpayers.
The Congressional Budget Office (CBO) estimates that the legislation will cost US$940-billion over ten years and reduce the federal deficit by US$138-billion during the same period. However, the Senate must now pass a budget-reconciliation bill that makes some significant "fixes" to the original Senate bill passed in December.
"They passed this bill, but it's not done yet," said Andrew Busch, global currency strategist at BMO Capital Markets in Chicago. "There is still quite a bit to change."
The reconciliation bill's price tag is lower at US$875-billion over 10 years, but it includes heftier subsidies to lower-income groups at the expense of higher taxes. The potential changes by Senate parliamentarians will depend on what they feel directly affects the budget. If the Senate makes any changes to this "side-car" bill, the House would need to vote on it again before it is sent to the President for signing.
Calling the CBO's US$138-billion estimate "false advertising" and the reform terminology a "misnomer," Citigroup Inc. health-care analyst Charles Boorady said the bill will result in an additional US$1-trillion in U.S. health-care spending over the next 10 years.
One the biggest assumptions included in the bill is more than US$400-billion in Medicare savings over the next decade.
"I don't think Congress has any kind of history with reducing Medicare spending-- ever," Mr. Busch said. "I can't envision that they'll be able to cut spending for Medicare and send it over to another portion of the bill. It just doesn't seem to make any sense." He thinks the CBO has been unable to score the reconciliation bill because it simply is not yet complete.
One issue of contention is the so-called "doc fix," a critical element of the cost of health care. These reimbursements to doctors that take part in Medicare are estimated to total US$20-billion to US$25-billion per year. However, since they were left out of the CBO scoring, doc fixes serve as just one example why a final tally is difficult to determine.
jratner@nationalpost.com
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