Congress doesn’t figure by same rules

By William Albrecht

U.S. Reps. Henry Waxman and Bart Stupak have summoned the CEOs of AT&T, Caterpillar, Deere & Co. and other firms to a congressional hearing to explain why they have announced that profits will fall as a result of the recently enacted health care legislation. Any or all of these CEOs are welcome to use the following:

Mr. Chairman, I am delighted to have this opportunity to explain why my company must take a charge against earnings of $1 billion (AT&T) or $150 million (Deere) or $100 million (Caterpillar). The reason is simple. We must now pay a tax on revenue not previously taxed. Thus, our earnings will decline.

Accounting rules (those that apply to private firms) mandate that such change be reported as soon as we are aware of it. This is what we have done.

I can, however, understand your confusion about our actions. This confusion exists because private companies and the U.S. Congress operate under different sets of accounting standards. Congress is only required to consider what will happen to this year's budget, whereas we in the private sector must consider a much longer period.

In the case of the current issue, it is true that there will little impact this year. Congress, therefore, is understandably perplexed about our projections of a substantial loss of earnings. The Securities and Exchange Commission, on the other hand, would take a very dim view of our use of congressional accounting.

This difference between private and congressional accounting standards accounts for much of the controversy over the cost of the new health care legislation.

As another example, consider its provisions for long-term health care insurance. Under governmental accounting rules, all revenues can be counted in the year they received with the outlays being counted in the years in which they are incurred. Under accounting standards for a private firm, this is not the case. When an insurance policy is sold, the firm is not allowed to count all the revenue as income. The firm must set most of this income aside in order to guarantee payment in the future.

This means that those using congressional accounting can say that the premiums from the new long-term health care will reduce the deficit by $77 billion. Those who think Congress should be held to the same accounting standards as private firms disagree.

Mr. Chairman. I hope my testimony has helped to clear up your confusion. I will be happy to answer questions.

William P. Albrecht is Emeritus Professor of Economics at the University of Iowa.