Report Finds Small Employers Don’t Use Health Care Credit

Did you have a pleasant National Small Business Week? Or perhaps, like most microbusiness owners, you were too busy to notice?


President Obama issued a proclamation declaring National Small Business Week to take place May 20-26, 2012. Both the House and the Senate passed resolutions acknowledging the occasion and declaring their undying love of small businesses … like they always do. And the Small Business Administration held its own shindig, during which it crowned its Small Business of the Year … like they always do.

For the record, the Small Business of the Year honoree has never been a microbusiness, in spite of the fact that nine out of ten U.S. firms has fewer than five employees.

Make of that what you will.

Meanwhile, while President Obama and Congressional Democrats and Congressional Republicans were all bragging about all the great stuff they’ve been doing or trying to do for small businesses — none of which is likely to be of much use to microbusinesses — the Government Accountability Office (GAO) released a report that is something of a case in point.

The Obama Administration is particularly proud of the small business friendly provisions in the Patient Care and Affordability Act. For example, there is a tax credit available for small employers that pay at least half their low-wage employees’ health insurance premiums (“low-wage” here means earning $11.50 an hour or less).

The idea behind the tax credit is to create an incentive for those small employers to start offering health insurance to their workers, something only 17% of them were doing as of 2009, and to make the premiums more affordable for said small employers.

Senate Small Business Committee Ranking Member Olympia Snowe (R-ME) and House Small Business Committee Chairman Sam Graves (R-MO) were wondering how that tax credit was working out, so they asked the GAO to look into it. The GAO has found that the tax credit might be working out a lot better if small businesses were actually using it.

It turns out that only 170,300 small employers from a pool estimated at between 1.4 million and 4 million eligible firms claimed the tax credit. The cost of the credit, pegged by the Congressional Budget Office at $2 billion in fiscal 2010, was only $480 million.

So, what happened?

It’s very simple and fairly typical of what happens whenever Congress does something to the tax code as a favor to small businesses. The GAO report confirmed that the tax credit is so complicated to figure out that small business owners don’t want to take the time to figure it out. That includes figuring out which of their employees qualifies to be counted as an FTE (full time equivalent) worker, whether they qualified in terms of wages, and which employees could be used for a partial credit or full credit.

This is not the only tax benefit that microbusiness owners don’t use because of the issue of tax complexity. It is estimated that only about one-third of eligible firms use the Business Use of the Home deduction, and only about 9% of qualifying small businesses use the Section 179 business expensing deduction. Complicated rules, computational complexities and a general sense that the tax benefit isn’t worth the hassle is what keeps may microbusinesses from taking full advantage of the tax code.

In addition, and this is also confirmed by the GAO report, it is difficult to incentivize the spending of money that small employers, and especially microbusiness employers, simply don’t have. Before you can qualify for the credit, you have to spend the money. Before you spend the money, you have to have the money.

I never thought this was a difficult concept but they have never seemed to “get” this one in Washington, from what I can see.

As a general matter, microbusiness employers care about their employees. They also know that they are competing for workers with larger companies that have more resources and can offer better benefits. Microbusiness employers would offer health insurance benefits to their employees, without government incentives, if they could afford it.

The fact that most of them don’t is not an indication of negligence or poor personnel management or miserly inclinations on the part of small business owners. It is simply an indication of the fact that their cash flow does not allow them to offer those benefits and a tax benefit that they won’t realize for a year isn’t going to make that money magically materialize in their company bank accounts.

Interestingly, neither Chairman Graves nor Ranking Member Snowe have released statements in response to the GAO’s findings, which were released in mid-May. It is possible that the report did not tell them what they wanted to hear or was otherwise insufficiently damning of President Obama’s health care reform initiative.

However that may be, this much is clear:  whatever the President and Congress intended by way of a small business friendly health care reform law, what they wound up with is every bit as useless for microbusinesses as most of the other small business policy that emerges from Capitol Hill.

Overwhelmed Photo via Shutterstock


Dawn R. Rivers Dawn R. Rivers, an award-winning small business journalist, regularly reports and analyzes small business policy and research as the publisher of the MicroEnterprise Journal. She also publishes research at the Microbusiness Research Institute and she blogs at The MicroEnterprise Journal Blog.

4 Reactions
  1. What the government fails to realize is that small businesses don’t have the time to keep up with every new program or incentive they pass to ensure their reelection. If they truly wanted small businesses to have an easier time they would be eliminating programs and drastically simplifying regulations.

    • Actually, what the government fails to realize is that small businesses are not just smaller versions of large businesses. They operate differently and the smaller they are, the more differently they operate. So the kinds of policy goodies that work nicely for larger firms are not necessarily helpful for smaller ones, either in terms of actual benefits or in terms of the administrative hoops you have to jump through to qualify for the benefits. If they want to do us all a favor, they’d simplify EVERYTHING … but I guess that’d be way too much to expect!

  2. Great report. I don’t think we should surrender the term “small” to them. Micro is too small to matter. We’re not micro. We’re small. We need to take the word back from them. The “Small” Business Administration needs to be dismantled and replaced with one that is actually aimed at small business.

    FYI – 98% of all employer businesses have fewer than 20 employees and if we include non-employer businesses as we should, it’s 99.6%.

    • I think there are some good reasons to make distinctions between small businesses and microbusinesses, Chuck. Microbusinesses, firms with fewer than five employees including nonemployers, are still 91.4% of all U.S. firms and (as I pointed out above) the smaller they are, the more their day-to-day operations are different from those of even firms with 20 employees. Stop and ponder that for a moment and it’s easy to see what I mean.

      Microbusiness owners also tend to have different goals and aspirations that the operators of larger small businesses. Their needs, including their policy needs, are generally different. I believe (I don’t know if anybody has actually crunched the numbers on this) their demographics are different, too.

      I would much rather work to change perceptions of “micro” as “too small to matter.” I’ve said this before, too: the smallest atom in the universe is hydrogen, and yet hydrogen is the fuel that powers suns.