Obamacare Tax Credits Encourage Small Businesses to Stay Small

The new law provides a 50 percent tax credit to companies offering health coverage that have fewer than 10 workers who, on average, earn $25,000 a year. The tax credit is reduced as more employees are added to the payroll.

The NCPA study finds the reduction in tax relief to be a cost concern for companies looking to hire additional workers, but operate on slim profit margin yet still provide employee health coverage.

“You wouldn’t think this would have an impact, but at the margins, when they [business owners] decide to hire an extra worker, they’re not only going to be paying that worker’s salary, they’re going to have to absorb the cost of losing the tax credit,” Pamela Villarreal, NCPA Senior Policy Analyst and co-author of the report, told The Hill.

A Treasury spokesperson acknowledged the tax credit is on a sliding scale, but stressed its primary aim is to help struggling companies provide health coverage to workers.

“The small business tax credit was designed to provide the greatest benefit to employers that currently have the hardest time providing health insurance for their workers - small, low-wage firms,” the spokesperson told The Hill in an e-mail. “Small employers face higher premiums and higher administrative costs than large firms, and in many cases cannot afford to provide coverage.”

Villarreal said the credit creates a perverse incentive for business owners that fit the Treasury’s profile. While the tax break is temporary and only returns a fraction of what employees cost a company, businesses owners might forego hiring an extra worker if it means losing a piece of the tax credit.