The Small Business Tax Credit’s Importance, and Difficulties in Its Implementation
Small Business Tax Credit
In 2010, the Patient Protection and Affordable Care Act (ACA), via §1421 and §10105(e), created a small business tax credit to help offset the cost of health insurance.1 The tax credit provides businesses that have fewer than 25 employees (or full-time equivalents) and average annual wages of less than $50,000 with a reimbursement if they cover at least 50% of their employees’ health insurance.2 The tax credit has different levels of reimbursement, providing the highest credits to the smallest businesses with the smallest payrolls.3 A company can only receive the credit for 6 years, but by that time the government expects the insurance exchanges established in ACA to provide small businesses with affordable health insurance options.4 While sentiment regarding this portion of ACA has been mixed, all parties agree that making health insurance more affordable for small businesses remains a priority.
Small businesses play a crucial role in our economy, spurring job growth and generating ideas that contribute to economic growth. In 2006, firms with fewer than 20 employees made up less than a fifth of private sector jobs, yet they contributed to a quarter of net employment growth from 1992 to 2005.5 Furthermore, start-ups catalyze much of our nation’s innovation, and most are small businesses. Between innovation and job growth, small businesses prove vital to our nation, especially if America intends to end this climate of economic lethargy.
A key to revitalizing our economic prowess is providing small businesses with affordable health insurance options. While rising health care costs handicap all U.S. businesses, they hit small businesses disproportionately hard. According to the White House and Small Business Administration (SBA), small businesses pay 18% higher premiums than their larger counterparts pay for the same health plan.6 This is due to small businesses’ high fixed administrative costs, broker fees, and experience ratings, because they distribute health risks across a smaller pool of people.7
Because of the exorbitant premium rates, fewer small businesses provide health insurance for their employees: only 49% small businesses with 3 to 9 employees and only 78% of small businesses with 10 to 24 employees provide health coverage, compared to 99% of firms with over 200 workers.8 The percentages are not only lower, but they are also declining; 58% of firms with 3 to 9 employees offered health insurance in 2002, but in 6 years that number dropped to 49%.9
The small business tax credit could have a far-reaching impact, if utilized by eligible firms. First of all, it could give newly insured workers peace of mind and ameliorate the stress of medical bills. It could also improve workers’ health, thus enhancing productivity.
For firms that already provide health insurance, the credit could be put towards boosting salaries. Even a small raise of $1000 would not be insignificant for employees making $20,000. Should the company decide to retain the money from the credit, it could invest in new projects, which could boost business. If the money from the credit were put towards improving a product or customer relations, mom and pop shops could regain business that had flocked to multinationals or discount chains.
Finally, the credit could keep jobs in America. While General Motors is not a small business by any stretch of the imagination, its story exemplifies the difficulties of foreign competition. When General Motors calculates costs per car, the company pays more for health care than for steel.10 All the while, Toyota and Honda spend one-tenth of what GM pays for health insurance, as Japanese insurance is largely government sponsored.11 Clearly GM is at a competitive disadvantage. Many firms in similar situations have chosen to outsource jobs to avoid providing health insurance. ACA’s tax credit helps keep jobs in America by paying for a portion of said insurance. The tax credit could alleviate health concerns while bolstering economic growth and competitiveness. However, employers have been loath to take up the credit.
Major Challenges to Implementation
Despite the Internal Revenue Service (IRS) mailing upwards of 4 million postcards about the tax credit, the response has been tepid at best.12 As of May 2011, only 228,000 taxpayers had taken advantage of the credit, compared to Congressional Budget Office (CBO) and National Federation of Independent Businesses (NFIB) projections of 4 million and 2 million respectively.13, 14 Primary reasons why it has not gained traction include its complexity, the tax compliance costs, confusion over “full-time equivalents,” and businesses’ difficulty in evaluating if they qualify.15
The White House, SBA, and IRS need to either make more explicit which businesses qualify, or they ought to defray the accounting costs of companies trying to determine eligibility on their own. Furthermore, the administration needs to combat the negativity surrounding the tax credit and “ObamaCare” more broadly. These measures could provide the impetus for the 70% of companies that have yet to determine their eligibility to do so.16
A final idea for facilitating implementation involves government partnerships with insurance companies. Blue Cross Blue Shield of Kansas City launched a successful ad campaign when the law was enacted; during a three-month timeframe in mid-2010, the insurer sold 227 plans to small business, 80% more than in a typical 3-month period.17 By joining forces, or at least by encouraging health insurers to solicit to small businesses, the insurers could use the tax credit as ammunition that would ultimately benefit the White House, insurance companies, small businesses, and the American public.
According to the NFIB, health care is the “most severe problem for small business owners.”18 In order to tackle the problem, lawmakers introduced the small business tax credit, estimated to save small businesses $40 billion by 2019.19 Despite slow adoption of the tax credit, as the administration further clarifies eligibility requirements and boosts advertising, the program will hopefully become more successful. In the end, the credit is a boon to small business owners and employees, and could benefit both the U.S. economy and the health of Americans.
1. Janemarie Mulvey and Hinda Chaikind, “Summary of Small Business Health Insurance Tax Credit Under the Patient Protection and Affordable Care Act (ACA),” Congressional Research Service, 10 Nov 2011.
3. “Fact Sheet: Small Business Health Care Tax Credit,” The White House, Office of the Press Secretary, 1 April 2010
4. Nate Thomas, “The Small Business Health Care Tax Credit: Does Your Practice Qualify,” ComplianceMatters, November 2010.
5. “The Economic Effects of Health Care Reform on Small Businesses and their Employees,” The White House
10. George F. Will, “What Ails GM,” The Washington Post, 1 May 2005,
12. Karen Kraushaar, “The Number of Claims for Small Business Health Care Tax Credit Was Much Lower than Anticipated,” Treasury Inspector General for Tax Administration, 7 November 2011,
13. “Fact Sheet.”
14. Stephanie Cathcart, “Just the Facts: Small Business Healthcare Tax Credit: Credit Will Not Make Healthcare More Affordable,” 20 July 2010,
15. “Small Business Health Insurance Tax Credit Not Seen as Incentive to Provide Employee Health Insurance, AICPA Tells Congress,” AICPA, 15 November 2011
16. “Kaiser Employer Health Benefits 2011 Annual Survey,” Kaiser Family Foundation, 27 September 2011
17. “Small Businesses Skip the Health-Care Tax Credit,” Bloomberg Businessweek, 26 August 2010
18. “Full Committee Hearing on Expanding Small Business Health Insurance Coverage Using the Private Reinsurance Market,” U.S. House of Representatives Committee on Small Business, 24 May 2007.
19. “Fact Sheet.”