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Small-Business Tax Credits Could Be Early Measure of New Law's Success

By Jane Norman, CQ HealthBeat Associate Editor

May 7, 2010 -- The IRS shipped postcards to more than 4 million small-business owners in April with the kind of good news rarely expected from the agency — a new tax credit is available if the businesses help pay workers' health insurance premiums. The credit is one piece of the new health care law that kicks in immediately.

But there's skepticism among some business groups as to how many small-business owners really will be able to take advantage of the tax break, due to its complexities and the requirements that businesses will have to meet. If you're literally a mom-and-pop operation, for example, you probably will have to forget it: Family members can't be included in the calculations.

The credit has also emerged as the next battleground in the political fight over health care as groups that opposed the law, such as the U.S. Chamber of Commerce, work to highlight the tax credit's flaws. Small businesses face problems finding and keeping insurance for their workers, many of them low-wage, and the credit could be a key early test of the law (PL 111-148, PL 111-152).

The White House is confident that the tax credit will work, and that the more small business owners find out about it, the more they'll like it. "Because of the reforms that were passed, millions of small-business owners are eligible for a health care tax cut this year," President Obama told the Business Council on May 4. In a Webcast the next day, Commerce Secretary Gary Locke predicted that the tax credit will be "huge" for small businesses seeking to offset their premium costs.

However, some small-business owners may not even realize that the credit is available because they've heard so much from critics of the health care law, said Sen. Al Franken, D-Minn. "I think small-business owners who tend to maybe get some of their information from your more conservative sources, when I have been traveling around Minnesota, they didn't know about this," he said.

Will It Be Enough?
But a major drawback of the tax credit is that many small businesses are made up entirely of family members, and they can't benefit, said Kristie Arslan, executive director of the National Association for the Self-Employed. "I think business owners will be investigating if they qualify, and they're going to find out they don't," Arslan said. The group opposed the overall bill even though it favored its insurance market reforms. "I think you will find there's going to be a backlash," Arslan said.

Small businesses pay on average 18 percent more for their health insurance plans than large companies, according to the Council of Economic Advisers. Just half of all companies with three to nine employees offered insurance to their workers in 2008, the Kaiser Family Foundation reports.

The long-term solution to that is expected to come through small-business health exchanges, or insurance marketplaces, in which small businesses will pool together to buy insurance. But that doesn't start until 2014, and the tax credit was intended as temporary though hardly universal — the Congressional Budget Office told lawmakers that 12 percent of small-business workers would qualify.

Beginning this year, the full tax credit applies to employers with 10 or fewer full-time workers with average annual wages of less than $25,000. Employers would have to cover at least 50 percent of workers' premium costs. Beyond those levels, a partial tax credit is available for businesses with up to 25 full-time employees and average wages of less than $50,000. The tax credit will be equal to 35 percent of the employer's premium cost. If the employer buys policies through state exchanges in 2014, the credit ramps up to 50 percent. By 2016, the credit ends.

The chamber points out the credit is not available for people who are self-employed and pay their own premiums, though they represent 78 percent of all small businesses. It also remains unclear so far who is considered an employee for the purposes of calculating the average wages. If the owner's is included, it could skew the average wages much higher.

"It really is pretty limited, and that is some of the disappointment with it," said Amanda Austin, director of federal public policy for the National Federation of Independent Business (NFIB), which also opposed the law. Another problem NFIB sees is that small business' premium costs will spike when the credit phases out.

Mark Pauly, a professor of health care management at the Wharton School at the University of Pennsylvania, said many small businesses don't see the value of offering health insurance to low-wage workers and need a major inducement to do so. A tax credit may not be enough. "If I had to bet, I don't think the takeup will be particularly high," he said.

White House allies say it can work, and they're striving to get the word out. Terry Gardiner, executive director of the Small Business Majority, which generally sided with Democrats on the law, said he's promoting it to his members, and his group's website features a calculator so people can figure out whether the credit will benefit them. Interest is high. "We're meeting with business owners," he said. "They're punching numbers in."

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