As small business goes, so goes the economy. They have been responsible for creating almost two-thirds of all net new jobs over the last 15 years. Indeed, one reason Obamacare is such a concern is that it will significantly reduce the incentive for small businesses to hire. Especially once the premium subsidies become available in 2014.
The premium subsidies are Obamacare’s way of making health insurance more affordable for low-income earners who buy coverage in the new exchanges. Eligibility for a subsidy is limited to people who lack public or employment-based insurance and have incomes less than four times the poverty level. The values of the subsidies are set so as to limit the amount one contributes towards insurance as a percent of income.
The actual implementation, however, is complex.
Say you’re under 65 and not on Medicaid (or CHIP), and the year you would be eligible to purchase insurance through an exchange is 2014. Your premium subsidy is determined by your income and family structure from two years earlier (in this case, 2012), applied against the poverty level for the calendar year in which you purchase the insurance (2014).
The consequences of this complicated formula are far worse.
For instance, what if your income or family structure is different in 2014 than it was in 2012? Obamacare allows people to apply for “changes in circumstances” if they were married or had children in the interim. It also allows those who lose a job or expect to experience significant reductions in income (a decrease of 20 percent or more) to apply for an adjustment to their subsidy.
However, those who experience a significant increase in income will have to pay additional taxes equal to the amount of the overpayment in the premium subsidy for the tax year in which the credits are used to buy insurance. Originally, Obamacare capped the amount the IRS could collect at $400 a family. Congress increased that cap to pay for the most recent Medicare “doc fix” and then again to pay for the repeal of Obamacare’s 1099 reporting provision, giving the IRS authority to go after amounts as low as $600 for people making less than two times the poverty line, as high as $2,500 in overpayment for people making under four times the poverty line, and the entire value of the subsidy for those making more than four times the poverty line.
Does anyone experience large swings in income? Small business owners can experience a tremendous amount of year-to-year change in income. In fact, it’s easy to imagine a small business owner who qualifies for a tax credit to buy insurance in 2014 based on their income in 2012 and experiences a profitable year in 2014 only to owe the value of the tax credit (on top of their other taxes) in April of 2015, regardless of how well their business is doing by that time.
There are hundreds of thousands of taxpayers who rely on their small business income and would likely qualify for a tax subsidy that must consider the possibility that their incomes may jump, forcing them to pay back a large portion of the overpayment. This threat of a potentially large tax bill could induce many small-business owners who would likely qualify for premium subsidies to save money for the IRS rather than invest in their business or hire new employees.
Take an average small business owner qualifying for a premium subsidy – in their mid-40s, married, with two children, and a household income of about $60,000 in 2014. According to data from the Kaiser Health Reform Subsidy Calculator, their household will qualify for a premium subsidy of over $9,300 in 2014. However, since most small business owners have little way of planning how successful their business may be in any given year, they would be inclined to plan for the possibility of paying back the entire premium subsidy on top of the taxes they would already owe.
How will this influence her decision to hire new employees or invest in the business? Tax economists have studied how small business owners respond to changes in personal income tax rates. Based on the findings of those studies, the likelihood that the average business owner qualifying for the subsidies will hire new workers is reduced by about 70 percent.
As Sherk and Hederman note, the high unemployment is driven in large part by reservations of businesses to hire. Unfortunately, it seems that the Obamacare will do more to continue this trend as the economy struggles to recover.