#4 How Obamacare will Transform America

1.    #4: Obamacare will put a heavier burden on small businesses in these fragile economic times, jeopardizing the economic recovery.

      

      According to recent stats from the Small Business Association, small businesses, defined as having less than 500 employees, make up over 99% of all employer firms, and employ over half of private sector employees. Small businesses drive the economy; they produce over 50% of non-farm US GDP. Over half of small businesses are home-based and face higher compliance costs with tax laws than their larger counterparts. They constituted nearly 65% of hiring of net new jobs between 1993 and 2008. 

S    Some major impacts on small businesses are reported by Fox and CNN:

• States, by no later than 2014, must establish Small Business Health Options Programs (SHOPs), which will enable small businesses to pool their resources to buy insurance;
• Until the SHOPs are established, businesses with 10 or fewer full-time employees earning less than $25,000 on average will be eligible for a 35 percent tax credit; firms with up to 25 workers who average up to $50,000 will receive partial credits, while businesses with more than 25 workers will receive no credit;
• Those tax credits will remain steady at up to 50 percent of costs for the first two years any company buys insurance via state exchanges;
• Beginning in 2014, under the reconciliation plan, firms with more than 50 employees must offer health care to employees or pay penalties of up to $2,000 per employee for all but the first 30 workers. (The penalty would initially be $750/employee but would eventually rise to $2000). This also includes mandated coverage for part-time employees.

      However, small business owners don’t seem to take comfort in these tax credits. The National Federation of Independent Business, a major small business association, sent Sen Harry Reid and Sen Mitch McConnell a letter about 6 months ago warning that the health care bill raise costs for small businesses. Factors cited that were included in the final bill:

• Incentives for small businesses to cut back hiring of employees (the bill mandates that businesses provide all employees health care coverage once they have 50 employees)
• Due to the rise in premiums that will come about because of the mandates on the type of insurance people must purchase, small businesses may be forced to drop coverage since they are especially sensitive to price changes. Small businesses have lot less capital cushion than large businesses.
• The change in precedent for steeper payroll taxes on specific wage owners (those who make over $200K annually); businesses still have to pay a portion of these taxes.
• Higher paperwork costs to meet government compliance standards

NFIB is not the only small business group worried. The chairman of the National Small Business Association said the following:

"There's going to be a lot of incentive to drop coverage, even with the penalty," Ashmus said. "And will we not be getting subsidies because of our size, and we are still in the small-group  market because not all of our employees get coverage through us. That will impact us  significantly."

Like other NSBA officials, Ashmus said other shortcomings of the legislation include the sharp and continual rise of small business health premiums and tax increases on both earned and unearned income.

"This bill will place significant new pressures on small businesses to both offer and pay for employee health insurance, starting in the earliest stages of reform," the National Small Business Association (NSBA) said in a statement. "However, the provider-level reforms that could contain costs and enable small business to afford this commitment will not be fully effective for many years — if at all. We justifiably expect that small companies caught between these twin pressures will see their ability to grow, prosper and create jobs greatly diminish." 

Because this bill will drive up health insurance premiums, the incentive to drop coverage and pay the fine grows stronger as costs escalate. We analyzed earlier how premiums in the individual insurance market will also rise under this bill. Many people are going to be forced into the exchanges, or will simply opt to pay the fine for not having insurance. The latter will most likely be cheaper. This will most likely exacerbate health care costs, potentially creating a downward spiral where more businesses drop coverage and pay the penalty as cost rises, and so on.

Upward costs are not the only way small businesses will feel a hit. ABC reports new investment taxes: a 3.8% tax would be imposed on interest, dividends, capital gains and other investment income for individuals making more than $200K a year, and couples making more than $250K. The bill also increases the Medicare payroll tax by 0.9 percentage point to 2.35 percent on wages above $200,000 for individuals and $250,000 for married couples filing jointly. While the majority of small business owners make under $200K (many small businesses are one-man shops or only employ a handful of people), the largest ones that fall in that income bracket are the job creators.  Heritage estimates that while companies with 50–199 workers represent only 8 percent of total firms in the U.S., workers across these companies comprise an estimated 22 percent of total employment in the U.S. 

Moreover, these taxes are not indexed to inflation, meaning more businesses will eventually fall in this category.   Higher taxes on their investments will lead to some sort of trade off, most likely, negatively impacting job creation or wages.  Since many of these mandates do not take effect until 2014, it's possible we'll make an economic recovery before then despite the law. But income and investment is simply zero sum: the more you tax it, sooner or later, the less there will be--the only thing that grows with higher taxes is the government.