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Tying an Auto Industry Bailout to Health Care

posted by Bob Lawless

I'm skeptical about a government-sponsored auto industry bailout and think chapter 11 probably provides the best policy tool to deal with the current problem. Although auto industry execs have balked at the idea of a bankruptcy filing, some have promoted the idea of a "prepackaged" chapter 11 as if it offers some sort of risk-free panacea. That is wrong, and I recommend Fred Tung's post over at The Conglomerate where he discusses the pitfalls that even a prepackaged chapter 11 might have. Discussing a prepackaged filing presents similar tough issues as a regular chapter 11. My task with this post, however, is not to take on the question of whether we should bailout the U.S. auto industry but, if we do decide to do it, one way we might do it better.

Former Credit Slips guest blogger and oberlawyer David Yen suggested to me that an auto industry bailout be tied to the industry's health care costs. This is a good idea and deserves some attention in the debate. The idea, as Yen wrote to me, is:

Instead of just giving the Big 3 auto companies money, we should give them tax credits tied to their health care bill. The tax credit would be structured so that if a more comprehensive health plan is ever enacted, there could be a relatively smooth transition. This would be a two fer.

The tax credit would incentivize the auto companies to ensure their workers have adequate health-care coverage, helping to alleviate one of the biggest financial stresses on the American middle class.

One thing that particularly appeals to me about Yen's proposal is that it would harness the disciplining effect of the market to force auto companies to come up with realistic long-term business plans.The tax-credit proposal perhaps might be even be extended to pension costs. The proposal then would eliminate the principal competitive disadvantage of the U.S. auto industry, namely the huge employee benefit costs that non-U.S. automakers do not have to pay. The U.S. automakers would no longer have  high employee benefits costs as an excuse for their failure to compete with apparently more nimble and creative automakers outside the United States.

The proposal is not perfect. For one thing, the tax credit would not raise the $25 - $50 billion in funds the automakers want. In 2007, health-care costs for GM were $4.6 billion and $2.2 billion for Ford according to their annual reports. (Thank you to Amy Tomaszewski, a University of Illinois Reference Librarian and Assistant Professor of Library Administration, for tracking down those figures.) As a private concern, Chrysler's health-care costs were not available, but even added together, the Big 3's health-care costs are not going to come to the amounts the auto industry seeks. Also, the Big 3 need cash today. A tax credit would produce money tomorrow, an income stream against which the Big 3 theoretically could borrow to raise cash today. But, theory does not necessarily work with the credit markets nowadays. Perhaps the government could advance the funds as a loan to be repaid by the tax credits? Finally, one would have to structure the tax credits in a way they do not cause the automakers to overinvest in "gold-plated" coverage for their employees--a weakness that Yen also identified--and maybe such a corrective is easier said than done?

There may be other problems to Yen's proposal that are not immediately evident. It is, however, a very creative idea that deserves discussion. I hope I have done justice to it with my description. Comments are open.


"we should give them tax credits tied to their health care bill."

I'm sorry, but these companies are claiming that they're on the ragged edge of bankruptcy - do they even have profits that they can apply tax credits to?

I like the idea of incorporating Federal Government provided health care into the bailout package - administered of course through the very efficient agencies that support Medicare and not through the inefficient and expensive private insurance system. I just think it has to be more direct, immediate and explicit than tax credits.

CathyG raises a very, very good point. The auto companies are on the ragged edge of bankruptcy and likely not to have tax liability, but why couldn't we make the tax credits work simply by allowing them to generate a refund/payment to the automakers regardless of the outstanding tax liability?

Am I wrong or do autoworkers have some of the best benefits packages available?

Would this be only for non-union employees?

If so, are their sufficient numbers to make the effects substantial (assuming you get past the issue described above).

Stop with bailing out the middle class. As a member of the lower-end of the middle class, STOP. Thank you.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.