Small business insurance and the health-care tax credit

The bedrock of American business lies in the small business sector and, if there was any justice in this world, the small business sector would be encouraged to offer health plans to their employees. So it was good to see the Affordable Care Act apparently offer support. In theory, any small business with less than 25 employees who have an average pay of less than $25,000, can claim a refund of 35% of the premiums paid in the first three years. After 2014, the credit rises to 50%. This sounds good until you hear that only about 170,000 of the eligible firms claimed the credit in 2010. That about 17% of the intended recipients. So what is going wrong when the research evidence shows that more half the small business currently trading offer health plans?

The real problem seems to be the process for claiming the credit is very complicated and most business owners think the rewards too small to justify investing the time and money to complete the forms. This is not the fault of the IRS. The complexity was written into the law. Indeed, one explanation is the possibility of a deception by the lawmakers who wanted to make the law seem to be more generous than it would prove to be in practice. This makes good politics and, equally importantly, does not add to the deficit. Anything that saves the Treasury from having to pay out subsidies to needy people keeps government small and popular with the GOP. Put another way, the first estimates were this credit would cost about $2 billion in 2010. The actual number is about $500 million.

The White House has said the number of small businesses claiming the benefit rose to about 360,000 in 2011 but that is still a pathetic percentage of the total number thought to be eligible. When the Democrats proposed simplifying the process, the GOP voted it down. So small business insurance costs have not risen significantly because health plans have not been added. Businesses have not lost anything by being denied the credit, but expectations of business insurance covering health costs have been frustrated.

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