Why Small Businesses Aren’t Using the Health Insurance Tax Credit
Thursday, May 24, 2012
If you want small business owners to use a benefit, don’t make it more costly to get than it’s actually worth.
The White House estimates that only 360,000 of the 3.2 million companies thought to be eligible for the Small Business Health Care Tax Credit made use of it in fiscal 2011, according to a report released by the Small Business Majority and Families USA. Why are so few businesses making use of a credit designed to help them cope with the high cost of providing employee health insurance?
The answer matters. If small business owners are unaware that the credit exists, then the Internal Revenue Service (IRS) needs to better promote it. But if small business owners are not interested, then Congress needs to reconsider its plan to motivate them to give health insurance to their workers.
The Small Business Majority, an advocacy group that supports the president’s healthcare law, believes that the problem is lack of awareness. In a blog post last summer, John Arensmeyer, founder and CEO of the Small Business Majority, argued that most small business owners are too busy to learn that the credit is available. Other data, however, suggest that lack of awareness isn’t the issue.
If the goal is to look like they are helping small business, while keeping the tax credit from increasing the deficit, then Washington got it right.
A report from the Treasury Department’s inspector general explains that the IRS has tried hard to educate small business owners and tax professionals about the tax credit. The government agency has issued press releases, sent electronic messages, created a webpage, made presentations to tax advisors, established a telephone answer line, and mailed information on the credit to 4.4 million potentially eligible taxpayers.
A survey of more than 300 small business owners undertaken by the Small Business and Entrepreneurship Council a year ago showed that most business owners knew of the credit, with only 20 percent saying that they were unaware of the tax benefit. A majority (51 percent) of respondents said that while they knew about the credit, they were not taking advantage of it because either “their business was not eligible,” the credit was “too small” or offered “no real benefit,” or the credit was “too complex.”
Many small business owners are not taking advantage of the credit because only a small minority of companies is eligible. Of the roughly 6 million employer businesses in this country, the National Federation of Independent Businesses, which opposes the president’s healthcare law, found that less than 2 million have the size, payroll, and insurance coverage requirements to be eligible for the credit.
Even eligible business owners think the credit is not worth getting, many tax preparers believe. When the IRS queried professional organizations on why so few businesses were claiming the credit, a common refrain was that “the credit is not worth the time and effort to claim,” the Treasury Report explains.
The credit only lasts for six years, while the cost of insurance will continue indefinitely, and is likely to increase, given historical trends.
Few small business owners are able to apply for the credit without professional assistance. The Treasury Department report explains that “seven worksheets must be completed in association with claiming the credit.” To figure out if they qualify, employers must “determine the employees who are taken into account for purposes of the credit; determine the number of hours of service performed by those employees; calculate the number of the employer’s FTEs [full-time employees]; determine the average annual wages paid per FTE; determine the premiums paid by the employer that are taken into account for purposes of the credit.”
Some small business owners have rejected the tax credit on financial grounds. The average credit is $800 per employee, the Small Business Majority and Families USA reports. However, analysis by the Kaiser Family Foundation that the average premium for health insurance at a small business in 2011 was $5,328 for single employees and $14,098 for family coverage. Since an employer needs to pay for half the premium to get the credit, that means incurring a cost of $2,664 for employee-only coverage in return for a credit of $800. Moreover, the credit only lasts for six years, while the cost of insurance will continue indefinitely, and is likely to increase, given historical trends.
There’s a lesson here for policymakers: If you want small business owners to use a benefit, don’t make it more costly to get than it’s actually worth. Of course, that assumes policymakers’ goal is to get small business owners to use the credit. If the goal is to look like they are helping small business, while keeping the tax credit from increasing the deficit, then Washington got it right. Providing a tax credit that few small business owners want allows politicians to have their cake and eat it too.
Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.
FURTHER READING: Shane also writes “When Reducing Barriers Leads to More Failed Businesses,” “Why Aren’t Banks Lending to Small Business? Ask Bernanke,” and “Getting Venture Capital Back on Track.” Robert E. Moffit and James C. Capretta explain “How to Replace Obamacare.” Thomas P. Miller, Grace-Marie Turner, and James C. Capretta discuss “Why the (un)Affordable Care Act Should be Repealed and Replaced.” Alan D. Viard contributes “The Misdirected Tax Debate and the Small Business Stock Exclusion.”
Image by Rob Green / Bergman Group