Wednesday, July 21, 2010

The Fine Print on Small Business Tax Credits

Families USA and the Small Business Majority released a study today claiming that the vast majority of small businesses would be eligible for tax credits under the health care law.  As might be expected with a study commissioned by the law’s supporters, however, the devil is in the details, and as a result, the study’s main claims do not withstand great scrutiny:

  • The study examines firms eligible for the tax credit, but does not report on the number of small businesses that will actually receive tax credits.  In order to receive the credit, firms have to decide to offer coverage, and pay for at least half of employees’ premiums.  Rep. Camp’s staff prepared this helpful chart showing all the hoops small businesses have to go through to actually receive the credit – but the Families USA study omitted the last two steps (employers offering coverage, and paying at least 50% of premiums) in order to produce an inflated estimate of the credit’s impact.
  • In making the claim that over 80% of “small businesses” will be eligible for the credit, the study defines a small business as one with 25 or fewer employees – a convenient cutoff point for the study’s purposes, since small businesses with more than 25 employees aren’t eligible for tax credits under the law.  Under the study’s logic, if you’re not eligible for the tax credits, you’re not a small business.  Millions of firms with a few dozen workers struggling to pay for health coverage may disagree with this flawed conclusion.
  • The Congressional Budget Office also disagrees with the authors’ assumptions that the credit will help a wide array of small businesses – last November, CBO wrote that “A relatively small share (about 12 percent) of people with coverage in the small group market would benefit from that credit in 2016.”
  • Even under the authors’ rosy assumptions discussed above, less than one-quarter of small businesses with fewer than 25 will be eligible for – let alone receive – the maximum tax credit of 35% of premiums.  That fact alone signifies the limited impact the tax credit will have on small business.

NFIB has a helpful chart giving a more realistic estimate of the small businesses that may actually receive tax credits. (Note again that the percentage estimates only examine firms with under 25 workers; under a more expansive definition of “small business,” the percentage of affected firms would be appreciably lower.)

There are of course two bigger questions at play for small businesses – affordability and taxes.  In order to obtain tax credits, firms not currently offering coverage must absorb higher costs (firms must pay half of premiums to become eligible, but the credit this year only funds 35% of premium costs).  The credit itself is limited in both amount and duration – meaning that firms will need to absorb the full brunt of premium costs in relatively short order.  But the bill itself contains dozens of mandates to be implemented over the next several years, each of which could raise premium costs by 1-3 percent.  Who then would want to take on new health care costs – or even continue to offer coverage – knowing that the meager small business credit will soon expire, and a mountain of premium-raising federal mandates loom on the horizon in its stead?

In addition, the more than half a trillion dollars in taxes included in the new law will have a substantial economic impact on businesses.  For instance, Section 9006 of the health care law requires vendors and small businesses to file Forms 1099 for any goods purchases that total over $600 in the aggregate over the course of a year – which will force all businesses, including small businesses, to file tax forms listing the amount of their annual transactions with vendors like their paper supplier, bottled water distributor, caterer, etc.  According to the National Taxpayer Advocate, this provision – which she called “disproportionate” and “burdensome” for small firms in particular – will affect 40 million businesses, ten times the number of firms the study asserts will benefit from small business tax credits.

Higher taxes and rising premiums do NOT constitute true health care “reform” – and while the authors of today’s study may be attempting to re-direct focus on to a relatively paltry tax credit, American businesses, just like American workers, are already seeing the adverse effects of Democrats’ unpopular law emerge before their eyes.