The Underwhelming Tax Credit

The farther America gets into the Obama administration’s Affordable Care Act, the more piecemeal the law seems. At the center of it lies a complex network of methods for reducing the number of uninsured Americans, with little regard for how these methods will react with one another, and with little regard for their effect on the healthcare problems of the future: quality and cost. Insuring Americans with preexisting health conditions raises insurance premiums to such a point that it seems even an unconstitutional individual mandate can’t keep costs down. The Medicaid expansion tries to increase the insurance footprint of the President’s law while putting more trust in an already unsustainable program. During the law’s campaign period, the President cited its small business tax credit as a reason why, while vastly expanding public sector influence over healthcare, it would help the private sector as well. For a variety of reasons, it has not been turning out that way.

Last year, of the 4.4 million small businesses targeted for the tax credit and contacted by the IRS, only 170,300 have taken advantage of it. Liberal small business activists like John Arensmeyer are quick to blame the tax credit’s failure on lack of information, despite the fact that the 4.4 million businesses were each sent a personal postcard. A far more likely culprit is the tax credit’s pages of administrative hassle, tight eligibility requirements, and overall concerns about the Affordable Care Act’s general effect on small business.

According to a study conducted by the Government Accountability Office, despite the administration’s advertising of ‘three simple steps’ to take advantage of the tax credit, “the three steps become 15 calculations, 11 of which are based on seven worksheets, some of which request multiple columns of information.” This administrative headache seems like only a half-hearted attempt to encourage small business owners to take advantage of the new tax credit, particularly in an environment where insurance benefits are on the wane. In the last ten years, the proportion of very small businesses (3-9 employees) offering health coverage fell by ten percentage points as medical costs have continued to rise.

Another problem with the credit is its combination of strict eligibility requirements and little reward for most recipients. For example, the credit is only available to businesses that pay their employees less than $50 thousand annually. Not only does this rule have the problem of incentivizing low pay for employees, but it eliminates from eligibility those many businesses that prefer to pay higher wages. This is of course not to mention the fact that businesses paying low wages are the least likely to offer health coverage, and that a minor tax break is unlikely to change that. There have been legislative proposals, such as one in the senate proposed by John Kerry, to raise the maximum wage for the credit, but these have not been adopted. But even for those who have taken advantage of the credit, it often comes out to very little. Matt Helbig, a small business owner with three shoe stores, in 2011 received only a $400 credit after accounting costs were subtracted, out of his $20,000 of overall health insurance spending.

Despite the importance of all these factors, perhaps the most important is that despite the administration’s promises that the ACA would bring down overall healthcare costs, the opposite has happened so far. It is hard to imagine that a small business would want to begin providing insurance for employees when it is unclear whether such coverage will be affordable a few years in the future, after employees have become accustomed to it. The tax credit is, at most, a short-term fix that will only work until healthcare costs are brought under control.

The administration’s shallow support of small business employer-based insurance is revealing. Despite the rhetoric of helping an ailing private sector provide for itself and its employees, the administration’s aid has been tepid at best. Perhaps they would prefer that those $50,000-per-year employees whose business finds the credit unprofitable go on Medicaid.