Dallas (PRESS RELEASE – May 21, 2010) — Although the IRS announced yesterday the ground rules for small businesses eligible for a new federal tax credit, small business owners may be in for a big surprise. The tax credit penalizes employers if they hire more workers or increase salaries, according to a new report by the National Center for Policy Analysis.
“The tax credit is supposed to offset part of the burden of a new employer mandate to provide health insurance for their employees,” said Pamela Villarreal, NCPA Senior Policy Analyst and co-author of the report. “However, as firms grow, they will be penalized if they hire more workers or raise employee wages.”
The NCPA report explains that from 2010 to 2014, many businesses that employ 25 workers or fewer will qualify for a tax credit worth up to 35 percent of the employer’s contribution to workers’ health coverage.
As a firm’s average pay rises above $25,000, the tax credit slowly decreases at a rate of 4 percentage points for every additional $1,000 in average pay, and is completely withdrawn once average pay reaches $50,000.
Suppose, for example, a firm with 13 workers with an average pay of $25,000 hires an additional worker, which raises the average pay for all employees:
- If the addition of a more highly paid worker, such as a supervisor, increases the firm’s average wage 10 percent to $27,500, the total tax credit the firm receives falls from $36,400 to $32,760, making the marginal cost of adding the supervisor $3,640.
- If the addition of the supervisor increases the firm’s average wage 20 percent to $30,000, the total tax credit the firm receives falls from $36,400 to $27,300, making the marginal cost of the supervisor $9,100.
- If the firm’s average wage increases 50 percent to $37,500, the total tax credit it receives falls from $36,400 to $14,560, making the marginal cost of the supervisor $23,660.
- Although the tax credit is meant to benefit small businesses, it will cause some employers to substitute capital for labor and more highly skilled workers for less skilled ones,” said NCPA Senior Fellow Devon Herrick, co-author of the report. “Some low wage workers will be unemployed who otherwise would not be.”
To review the full report, log on to http://www.ncpa.org/pub/ba703. To view her blog entry on the topic, log on to http://tiny.cc/as1nc.