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Side Effects: Small Businesses Still Left Empty-Handed

Kathryn Nix
The Foundry, The Heritage Foundation
May 18, 2010

One of the great promises of Obamacare, you’ll recall, was that it would give folks working in small businesses better access to affordable care. “It works for small business owners,” Nancy Pelosi announced, “providing access to affordable group rates and creating a tax credit for them to help them insure their employees.” This sounded like it would be a huge help, because small firms struggle to find affordable coverage for their workers.

Unfortunately, the Obamacare small-business tax credit just doesn’t get the job done, according to the National Federation of Independent Business (NFIB), the nation’s largest small-business advocacy group. NFIB reports that provisions aimed at expanding small-business-sponsored coverage will have little real impact—though their cost will be all too real.

Dr. Bob Graboyes writes, “The new Small Business Health Insurance Tax Credit probably won’t induce many businesses to offer insurance to their employees. Firms that qualify for the credit ought to take it, but most who do will be firms who were going to offer coverage anyway…”

Qualifying for the credit is the real sticker. Maximum eligibility applies only to employers with 10 or fewer workers, whose average wages are less than $25,000 a year. For these firms, the credit would cover 35 percent of insurance premiums—but firms so small would likely struggle to cover the rest of the cost of offering health insurance even with this level of assistance.

Further provisions whittle down eligibility for the credit. Businesses must cover at least half of the premium costs. Otherwise, no credit. What if they add an 11th employee? Bye-bye credit. Raise average wages above $25K… adios credit. Even offering better insurance policies than the average small firm would reduce the value of the tax credit received.

Bottom line: qualifying for the small-business tax credit isn’t easy. If you do qualify, you’ll have to limit hiring and employee compensation to keep it. And, even then, the credit is only a temporary help. After six years, the business and its workers have to pick up the whole tab.

When it comes to helping small business expand health coverage, Obamacare offers much less than meets the eye. But the bill is still eye-popping. The Congressional Budget Office estimates the small-business credit will cost taxpayers $37 billion over the next 10 years.

Related Content

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Junk Economics: A Closer Look at Those Shocking Health Insurance Profits
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Side Effects: The Beginning of the End for FSAs
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