Lately, some attention has finally been given to the hoax that is the small business tax credit in the Affordable Care Act.  A recent report from the Treasury Department detailed how few businesses were actually filing for it: 228,000 compared to an expected 4.4 million.  This report precipitated a hearing on the Hill this week.

These disappointing numbers aren't surprising to anyone who read the bill (now law).  In a 2010 policy paper, I highlighted some estimates that put the number of qualifying firms far below the government's estimates:

Perhaps the main provision of the PPACA that has been praised as a “lifeline” to small businesses is the tax credit provision. A small portion of small businesses that provide health insurance to their workers will be eligible for a temporary credit.

To qualify for the credit, a firm must have fewer than 25 workers, pay average earnings under $50,000, and pay for at least 50 percent of employees’ premiums. Firms can receive the credit any year until 2013 and, after that, for two consecutive years of their choosing.

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.

But this mirage-like tax credit is the least of small businesses' worries when it comes to the health overhaul.  

I had the chance to hear from many businesspeople at a meeting of the Association of Washington Business in Seattle, WA, this week.  Small employers are rightfully afraid of the effects of state, and now also federal, over-regulation in health care.

First of all: time costs.  Small employers simply don't have time to read over reports like this one to stay up-to-date with the Department of Health and Human Services' attempts to micromanage the health sector.  Sadly, the biggest changes haven't even happened yet.  In 2014, many employers will recognize that the introduction of Medicaid expansions, state-level health care exchanges, and minimum essential requirements will change the landscape of health insurance in the U.S. so drastically that they will be better off letting their employees fend for themselves.

Secondly: cost in dollars.  Today in the Wall Street Journal, Kristen Gerencher reports on the tough choices small employers are already having to make after witnessing recent 12-13% spikes in premium costs:

Ms. Parker is unusual in the restaurant business, which typically offers skimpy health coverage or none at all, because she pays 100% of the employee's premium and 50% of their dependents' premiums. With Kaiser, she will offer four health plans to her workers next year. The one that she will fully cover comes with a $40 copay for doctors' and emergency-room visits and deductibles of $2,000 for individuals and $4,000 for families.

"It's a very uncomfortable position for any employer to be in, [weighing] the health of your company versus the health of your employees," Ms. Parker said. "If we offer too comprehensive of a program, we'll close down."

Finally, and perhaps most importantly, employers of all sizes are facing a great deal of uncertainty.  This affects smaller businesses even more adversely, because they often have fewer resources in the bank, fewer staff to task on interpreting the law, and are generally more vulnerable to the ups and downs of the market.  But small businesses in the U.S., at least up until recent years, have accounted for 60-70% of the new jobs created in our economy.  Uncertainty and job creation don't mix well.  

While the tax credit was unsuccessful in reaching as many small businesses as its creators hoped, there are a couple of up-sides to this mess.  The small business tax credit is in many ways a trap, expiring only a couple years after it begins, and presenting employers will higher marginal tax rates on growth.  From my paper:

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.

In addition to discouraging businesses from adding workers, the tax credit also discourages employers from increasing salaries, since average earnings have to remain under $50,000 for the firm to qualify for the tax credit, and the amount of the credit decreases as average earnings increase.

And finally, consider this "silver lining:" Since the tax credit was budgeted for $2 billion, and now will only cost $278 million, that's $1.72 billion in savings…. About 2% of the savings we were supposed to get from the CLASS Act.  What a laugh.