March 22 2011

ObamaCare Unlikely to Gain Popularity... During Tax Season

Hadley Heath

Time is ticking away... Only a few weeks left to file your taxes!

I almost laughed when I read this headline from The Hill: Administration hopes tax time will boost support for healthcare reform.

"Health care reform" meaning the one-year-old law that includes at least 20 different tax hikes?  Oh yes, that's bound to be popular around tax time. 

But the article from The Hill focuses specifically on small business taxes.  The administration is hoping that small businesses (that is, fewer than 25 employees) will apply for the small business tax credit in ObamaCare. 

An estimated four million small businesses may be eligible for a tax credit of up to 35 percent of their healthcare costs this year, according to the Small Business Administration (SBA). But critics say the credits' restrictions are too stringent - they're only for businesses with 25 or fewer employees that pay average annual wages of less than $50,000 - and the administration is eager to prove them wrong by getting as many businesses to sign up as possible.

All of this comes on the heels of comments from Starbucks CEO Howard Schultz, who said that, in spite of originally supporting health care reform, he's now worried about the nearly unbearable burdens it will place on American small business.  Okay, Starbucks is not a small business, and Schultz will not qualify for a tax credit, but it's refreshing to hear someone say, "I was very supportive..." but now he sees "the pressure is too great."

 Even if your business qualifies for a tax credit, you might be disappointed.  As I wrote in a policy paper, "The Impact of Health Reform on Businesses," there's a catch to the tax credits:

Beginning in 2010, the credit is equal to 35 percent of employer contributions to qualified coverage for each employee. In 2014, the credit will increase to 50 percent of employer contributions. The overall tax credit will decrease by 6.7 percent for each additional employee beyond 10 workers. This means that very few firms will qualify. The National Federation of Independent Business estimates that only 35 percent of firms with fewer than 25 employees will qualify for the credit at all.

Because the credits only apply to very small firms with small average incomes, this provision effectively discourages growth, hiring, and wage raises in firms that are on the cusp of qualifying for the credit. When employers consider adding valuable labor or skills to their firms in the form of more workers or workers with more education or greater skill, they make a cost-benefit analysis. By adding to the costs, the tax credit provision of the health care reform skews this analysis against hiring a new worker. In effect, if an employer wants to add a worker, the employer not only will have to come up with the money to pay the new worker's salary and benefits but will also face a higher tax bill, because the tax credit is reduced with each additional worker. This will raise the effective marginal tax rate on small business expansion and will discourage growth.

The Hill also notes:

The fight for small business support is one of the most bitter political battles being fought over the healthcare reform law as it turns 1 this week. A January poll earlier this year by the credit card company Discover found that more than half (55 percent) of small-business owners supported repeal.

Sorry, but I don't think tax season is really going to give ObamaCare a popularity boost among small businesspeople.

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