Health Care Reform Debate Continues to Focus on Small Businesses

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As members of Congress return to their districts during the August recess, they are sure to be bombarded by anti-government activists claiming that small businesses will be hurt by health care reform.

In the House of Representatives, the three committees with jurisdiction have approved a bill. The Ways and Means Committee and the Labor and Education Committee each approved a health care reform bill several weeks ago while the Energy and Commerce Committee finally approved its version on Friday, just before adjourning for the August recess. The Energy and Commerce Committee was hung up over disagreements between the committee's more conservative "Blue Dog" Democrats and main-stream Democrats like chairman Henry Waxman.

In the Senate (which has one more week before starting its recess), one of the two committees with jurisdiction over health care reform has approved a bill while the other, the Senate Finance Committee, has not yet found the bipartisan agreement that Finance chairman Max Baucus hopes for.

The Surcharge and Small Businesses

There are several unwarranted complaints about how the House bill (H.R. 3200) would impact small business. One involves the high-income surcharge that would partially finance the overhaul. Opponents of health care reform have argued that the surcharge would reduce small businesses' incentives to hire workers.

CTJ has previously released a report showing that only 1.3 percent of taxpayers would even pay the surcharge in 2011. Of the taxpayers who can realistically be called "small business owners," only 4 to 5 percent would pay the surcharge.

More importantly, taxes don't reduce the amount of money a small business owner has to pay workers. A taxpayer's income for tax purposes does not even include any money that the taxpayer pays to someone else as wages or salaries. So the surcharge would have no effect on incentives to hire workers. And any business owner who needs to purchase equipment to expand will probably be able to write these purchases off under the special expensing breaks available to small businesses.

In other words, opposition to the surcharge has more to do with opposition to progressive taxes and little or nothing to do with small businesses.

"Pay-or-Play" Rules

Another small business-related complaint concerns the "pay-or-play" rules that would require companies to either offer health insurance to their employees or pay a penalty. Some complain that the proposed pay-or-play rules do not exempt enough small businesses and that the tax credits for small businesses that provide health insurance are not generous enough.

Under the bills approved by the House Ways and Means and Labor and Education Committees, companies would be required to provide health insurance meeting certain standards to their employees or they would be subject to a payroll tax of 8 percent. Companies with a total payroll of less than $250,000 would be exempt. The payroll tax would be phased in gradually for companies with a total payroll between $250,000 and $400,000.

The version approved Friday by the Energy and Commerce Committee would exempt companies with an annual payroll under $500,000 and the full 8 percent payroll tax would only apply to companies with annual payrolls above $750,000.

Last weekend, the President's Council of Economic Advisers (CEA) released a report showing that firms with less than $250,000 in total annual payroll accounted for 77 percent of all firms, and 13 percent of all private sector employment, in 2006. (The CEA report also shows, indirectly, that 75 percent of all private sector employment that year was in firms with total payroll of more than $1 million.) In other words, a significant portion of the labor force would be in companies that are exempt from the "pay-or-pay" rules under H.R. 3200, and it's not obvious that expanding that exemption is a good idea.

The CEA report also explains why small businesses have the most to gain from health care reform. Small businesses that offer coverage to their employees often pay high fees to brokers. They pay more for the fixed administrative costs of insurance companies since they have fewer employees to spread those costs over. They suffer from insurance companies' practices of charging higher premiums to entities that have a workforce with greater health needs (which can mean a single sick employee in the case of a true small business).

The bills approved in the House would allow small businesses to purchase insurance in an exchange where administrative costs would be driven down through competition (thanks to an efficient public plan that competes with private insurers). Discrimination based on health status would be prohibited.

The CEA report also points out that even small businesses that do not offer health insurance to their employees could be helped tremendously by the reform, since it includes subsidies to low- and middle-income families who buy health insurance on their own in the exchange. This will make many people more willing to work for a company that cannot afford to offer health insurance to its employees.

Will Business Associations Ever Be Happy?

In some cases, it is unclear what outcomes critics of the current proposal desire. The National Federation of Independent Business (NFIB) published ten reasons why it opposes H.R. 3200, and some of them contradict each other.

NFIB finds the payroll tax imposed on firms not offering health insurance to be unfair. "Payroll taxes are especially onerous," NFIB argues, "because they tax labor rather than profits. No matter how profitable or unprofitable a business might be, they are forced to pay this tax."

One would think NFIB would be happier with the surcharge. The surcharge is not aimed at businesses at all but at high-income individuals. For taxpayers who are small business owners, the surcharge would only apply to their profits, and even then it would only apply to the 4 or 5 percent of small business owners with enough profits to be impacted.

Sadly, NFIB cannot support this either, because "small businesses are struggling to find capital." (Never mind that equipment purchases by any true small business would probably qualify for small business expensing, as already explained.)

NFIB's release also argues that the tax credits available for small businesses are not sufficiently generous. Since NFIB seems to oppose all taxes, it's unclear how they would pay for an expansion of the tax credits. Perhaps they feel that Congress should try harder to squeeze savings out of the pharmaceuticals, hospitals, insurance companies and other players in the health care system. When NFIB is ready to campaign for that, they will have our support.

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