1 October 2020
John Goodman
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Why small businesses aren't using the health insurance tax credit
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The White House estimates that only a small minority of companies thought to be eligible for the Small Business Health Care Tax Credit made use of it in fiscal 2011, according to a report released by the Small Business Majority and Families USA.  The immediate question then becomes, why would these businesses voluntarily forgo a tax provision meant to help them, asks Scott Shane, the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.

John Arensmeyer, founder and CEO of the Small Business Majority, argues that there is a lack of participation due to a lack of awareness -- that is, small business owners simply don't know about the credit.  However, surveys of relevant parties suggest that this isn't the case.

  • A report from the Treasury Department's inspector general explains that the IRS has tried hard to educate small business owners and tax professionals about the tax credit.
  • A survey of more than 300 small business owners undertaken by the Small Business and Entrepreneurship Council a year ago showed that most business owners knew of the credit, with only 20 percent saying that they were unaware of the tax benefit.
  • A majority (51 percent) of respondents said that while they knew about the credit, they were not taking advantage of it because either "their business was not eligible," the credit was "too small" or offered "no real benefit," or the credit was "too complex."

These surveys suggest that though many businesses are ineligible for the tax credit, even those that are elect not to pursue it.  Further analysis of the financial decisions involved suggests that this decision is a well-informed one.

  • The average credit is $800 per employee, the Small Business Majority and Families USA reports.
  • However, analysis by the Kaiser Family Foundation shows that the average premium for health insurance at a small business in 2011 was $5,328 for single employees and $14,098 for family coverage.
  • Since an employer needs to pay for half the premium to get the credit, that means incurring a cost of $2,664 for employee-only coverage in return for a credit of $800.
  • Moreover, the credit only lasts for six years, while the cost of insurance will continue indefinitely, and is likely to increase, given historical trends.

Source: Scott Shane, "Why Small Businesses Aren't Using the Health Insurance Tax Credit," The American, May 24, 2012.

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