July 30 (Bloomberg) -- The new health-care law is a threat to the health of small businesses. Its heavy dosage of mandates and penalties will be a financial burden, and the law is riddled with hidden barriers to stronger job growth.
The small business implications of the legislation are important because data from the ADP National Employment Report shows that since January 2001 companies with one to 49 employees were responsible for 36 percent of job growth, while those with 50 to 499 workers accounted for 44 percent of new jobs.
Small business vitality is crucial to the economic fortunes of U.S. workers, and substantial new costs that curtail their hiring should be of concern to companies, workers and policymakers alike.
Sadly, the new health-care law is an assault on small business, beginning with the 3.8 percent Medicare tax on net investment income -- a direct tax on many business owners. Of even greater concern is the law’s most celebrated feature -- the mandate to cover full-time employees with health insurance. For businesses with more than 50 workers, this means paying a penalty if any full-time workers receive subsidized coverage.
For larger companies already providing insurance, the law codifies the status quo. For every other company, the mandate will compete for scarce capital that might be used for hiring and expansion. It is even worse for firms with 50 employees or fewer, as the mandate presents a tremendous growth hurdle. For a business not offering insurance, hiring the 51st worker will trigger a penalty of $42,000. How many firms will choose not to expand?
The insult to these injuries is a draconian requirement that businesses submit Form 1099 paperwork to the Internal Revenue Service for every supplier from which they purchase more than $600 of goods each year.
Now business owners must ask: Where did my employees buy gasoline for the company car? Take a taxi? Buy sandwiches for a meeting? Every type of transaction will require companies to run a total and request tax identification numbers. The alternative is to stop patronizing small businesses and deal only with mega-corporations that will handle the record-keeping for them.
Add to these costs the fact that they have nothing to do with health care and that the IRS says it will have little use for the information. It is a small wonder that legislation is already pending in the House and Senate to repeal the 1099 requirement.
Advocates of the health-care law respond that the small-business tax credit will offset these burdens. But the credit is temporary (available for at most two years after 2014), is limited to only the smallest companies (fewer than 25 workers), penalizes the best-paying (workers must average less than $50,000 in pay) and requires that businesses switch insurance to the government-run exchanges. Furthermore it is laden with clawbacks that penalize growth.
The costs to small business will be compounded by the indirect effects of the legislation. Hidden beneath its budgetary sleight-of-hand are two expensive new entitlements that will exacerbate deficits as far as the eye can see.
As businesses juggle the potential for higher interest rates or higher taxes, they will face higher insurance premiums. The law levies roughly $500 billion in new taxes that will enter the supply chain for medical services, revealing themselves as higher medical costs. As health-care costs rise, insurance will become more expensive.
Small business will incur these costs while juggling the need to make benefits design changes. According to Mercer, a leading global health benefits consulting firm, 62 percent of small businesses have at least one red flag in their plan design that violates the new law’s mandates, and 14 percent have two red flags.
Similarly, 38 percent of small businesses are at risk for incurring “unaffordable coverage” penalties, which are assessed when employee insurance premium contributions are more than 9.5 percent of the average annual salary. There will be strong incentives to call it quits and simply pay penalties.
The authors of the health-care law reflect liberal indifference to the climate for business, perhaps believing that businesses have a hidden well of resources or an infinite ability to evade the burdens placed on them. Businesses will try to shift costs. But their ability to push the burden on customers with higher prices is quite circumscribed.
Instead, we would expect that the effective burden will be borne by workers in the form of lower wage growth, fewer hours and reduced job growth. The only other avenue is for business owners to pay the costs out of scarce capital, raising the prospect of increased failure rates.
In what might be the greatest irony of all, the health-care law is a threat to U.S. medicine. That’s because the most common business form among health providers is the sole practitioner.
The law flunks the test of real health-care reform. Real reform would: encourage providers to offer higher-quality care at lower costs; reduce the cost pressures that underlie the bankrupt Medicare and Medicaid entitlements; and give every American access to more options for quality insurance.
The health-care overhaul law is bad medicine and bad economic policy. From either perspective, the debate now moves to repeal, replace, retreat, repair and -- certainly -- regret.
(Douglas Holtz-Eakin, formerly director of the Congressional Budget Office, is president of the American Action Forum. Michael Ramlet is coordinator of Operation Healthcare Choice. The opinions expressed are their own.)
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