The Health Bill's Unemployment Implications

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WASHINGTON-Democratic leaders of Congress took pains when they passed the health care reform bill to advertise to voters that they had not forgotten about jobs, the public's paramount concern.

Senate Majority Leader Harry Reid declared, "This, of course, was a health bill. But it was also a jobs bill." And, from Speaker Nancy Pelosi, "It will create millions of jobs and strengthen our economic security by keeping America competitive and igniting innovation and entrepreneurship."

Despite such assertions, there is reason to wonder whether the new health care law will create jobs or destroy them.

By now everyone knows that beginning in 2013 Medicare taxes will rise on income and capital, reducing incentives to work and invest. Singles with earnings over $200,000 and joint filers who earn more than $250,000 will see their Medicare tax rate increase to 2.35% from the current 1.45%, and they will pay a 3.8% tax on unearned income.

It's also common knowledge that in 2013 employers will be required to pay a tax of $2,000 for every worker who gets health insurance through the state exchanges. This will reduce the employment of low-skill workers who don't currently get health insurance, and higher-skill workers without insurance will see cuts in take-home pay.

For millions of American workers earning $20,000 a years or less, this amounts to a tax of 10% or more or earnings. For millions more earning between $20,000 and $40,000, the health care bill creates an earnings tax of between 5% and 10%. The new bill substantially lowers the prospects of employment for countless millions of Americans.

As well as these and other major job-killing provisions, two little-noticed tax changes would also affect employment.

Consider this one: within days of the bill's becoming law, a rash of big-name companies announced that, because of the bill, they would be writing down their earnings for 2010. And other firms warned of future layoffs.

The growing list of companies filing notices of a write-down with the Securities and Exchange Commission includes AT&T, down $1 billion; Deere & Co., $150 million; Caterpillar, $100 million; Prudential, $100 million; AK Steel Holding, $31 million; 3M, $85-$90 million; and Valero Energy, $20 million.

Here's the explanation: the 2006 law that created the Medicare Part D prescription drug benefit also authorized payment of a 28% federal subsidy, up to $1,330 per retiree, tax-free, to each company for each retiree who took part in a company drug plan. By virtue of that benefit, the retirees did not participate in the Part D prescription drug plan, saving the government some money.

The law also authorized the subsidy to be deductible from taxes. The 2010 Act repeals that credit, raising corporate tax bills and lowering after-tax income. Hence the announced write-downs of earnings, namely statements by companies that they are in a weaker financial position than before.

Write-downs not only reduce companies' profits and retained earnings, they may also cause share prices to fall. That would make it harder for companies to raise, by borrowing or selling new equity, funds they need for investment. That could mean fewer jobs.

So far, the companies announcing write-downs have been large, unionized, labor-intensive businesses. It's likely that more announcements will come from manufacturing, mining and similarly labor-intensive industries. Towers Watson, a human resources consulting firm (formerly Towers Perrin), anticipates total write-downs of approximately $14 billion.

Another job-destroying tax provision of the 2010 health care reform law is a levy on production of medical devices. Beginning 2013, an excise tax of 2.3% of the sales of taxable medical device will be imposed. The tax is estimated to raise $20 billion over 10 years (approximately $2 billion annually).

Congress included the tax ostensibly because it believed that the health care bill would expand the market for medical devices through its individual mandate, resulting in more revenues to medical device companies. The real reason is that the Democrats were desperate for revenue so that the bill would be scored as reducing future federal budget deficits.

The industry exported more than $31 billion of devices in 2008. Major markets now include Japan, the Netherlands, Canada, and Germany. The United States also imports medical devices. Major sources of supply include Ireland, Mexico, Germany, and China. It's a globally competitive market.

Although U.S. companies that import medical devices will be subject to the tax, companies located offshore that export to countries other than the United States will not pay it. So American-based medical device makers would appear to be at a disadvantage and might conclude that they should relocate offshore. They would then pay the medical devices tax on units sold in the United States, but not elsewhere.

Jobs in the medical device industry might move overseas directly or indirectly. Manufacturers can close plants in the United States and replace them with plants in foreign countries, or they can locate future job growth abroad rather than at home. Additionally, foreign manufacturers can improve their competitiveness relative to U.S. firms, with the result that manufacturing for the American market is increasingly dominated by foreign-domiciled companies. Both are likely to occur under the new tax.

Employment effects of the new bill are starting to roll in. In a note to its employees, medical equipment manufacturer Medtronic has announced that it could lay off workers as a direct consequence of the health care bill. And Boston's Zoll Medical Corporation may try to move jobs abroad as it grapples with the new tax.

Minnesota, headquarters of many medical device manufacturers, would be particularly hard-hit, according to Don Gerhardt, chief executive of LifeScience Alley, a Minnesota-based trade group. On Monday he predicted that "Minnesota is going to take about 25 percent of the hit on the total tax levied against the medical technology industry."

As Speaker Pelosi so aptly noted, jobs are created by "keeping America competitive and igniting innovation and entrepreneurship." Too bad the new health bill fails.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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