Small-Business Health Care Tax Credits Are having a Miniscule Impact

The Small Business and Entrepreneurship Council recently surveyed 304 small business owners about how satisfied they were with the new healthcare reform law’s tax credits.

Nearly 90% had not applied for the credits. Some had no idea they existed, others were deemed ineligible, and more than a fifth found that they “offered no real benefit.” Only 7% of small businesses were actually using the tax credits earmarked specifically for them.

What gives? Why aren’t small enterprises taking President Obama up on his offer to help them “afford the cost of covering their workers?”

In short, because the president’s “help” is relatively worthless. Worse, other components of the law threaten to make health coverage even more expensive for American small businesses.

As many firms have learned firsthand, it’s nearly impossible to qualify for ObamaCare’s tax benefits. Through 2013, only employers with fewer than 10 employees and average wages of less than $25,000 a year are eligible for the full 35% credit. The credit’s value decreases as a company’s workforce increases beyond 10 employees — and as its average annual salary rises above $25,000.

Further, companies with more than 25 workers — or with an average salary of over $50,000 — are ineligible.

In 2014, the maximum credit will jump to 50% for qualified employers. But the salary limits will stay the same. At that time, the credits can only be used for government-approved coverage purchased through ObamaCare’s new insurance exchanges. By 2016, they expire altogether.

Given this barrage of restrictions, it’s no wonder the Congressional Budget Office estimates the credits will impact just 12% of folks in the small-group market.

Even for those who qualify, the tax credits may not be worth the trouble. Because they diminish as companies grow, a small business may have to choose between hiring new employees and keeping the tax benefit.

In other words, ObamaCare’s credits may actually discourage small firms from creating jobs.

Early evidence indicates that small businesses aren’t responding to the health law’s handouts. According to a January 2011 Discover Small Business Watch survey, fewer small businesses offer health coverage now than before ObamaCare’s tax credits were in place.

That’s because the credits do little to assuage business-owners’ chief concern — the rising cost of health benefits.

Nearly 70% of small businesses polled by Discover said that it’s difficult to find affordable healthcare for themselves and their employees. About the same number of business-owners believe that ObamaCare will make health insurance less affordable, according to the Small Business and Entrepreneurship Council.

It appears that they’re right. A new report from PricewaterhouseCoopers projects that employer health costs will rise 8.5 percent in 2012, thanks in part to the health reform law. That’s on top of an 8% projected hike this year.

Ordinary workers are feeling the pain, too. Since last year, their share of healthcare premiums has risen to 15.1 percent of the total cost — an increase of 1.2 percentage points. At firms with less than 200 employees, the average worker’s annual contribution toward his health insurance has shot up more than 38% — from $625 to $865.

One reason for the cost hikes, according to PwC, is that ObamaCare encourages healthcare providers to consolidate in order to form Accountable Care Organizations, which are intended to better coordinate patients’ care, starting initially with those on Medicare. But consolidation also reduces competition. That can yield higher prices. Indeed, the Robert Wood Johnson Foundation found that hospital consolidation in the 1990s drove up inpatient prices 5%.

Over the past decade and a half, small businesses have created almost two-thirds of new jobs. But their growth has slowed to a crawl in the wake of the recession. ObamaCare’s tax credits were intended to reverse that trend. But they’ve done no such thing.

Meanwhile, by inflating the cost of health care, the rest of the law has undermined any chance the credits had of helping small businesses pay for health coverage.

President Obama tried to buy small businesses’ support for his health overhaul with an over-hyped tax giveaway. Thus far, his offer is one they’ve been all too happy to refuse.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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