Whatever Happened to the Small Business Tax Credit?

December 28, 2011
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Yet another provision of ObamaCare has been found unworkable. We’ve already looked at the failure of the CLASS Act, the high-risk pools, and the Medical Loss Ratio. Now it turns out the much-vaunted tax credit for small employers is also a bomb.

Yet another provision of ObamaCare has been found unworkable. We’ve already looked at the failure of the CLASS Act, the high-risk pools, and the Medical Loss Ratio. Now it turns out the much-vaunted tax credit for small employers is also a bomb.

At a recent (November 15, 2011) hearing of the Ways and Means Committee, the Treasury Department’s Inspector General J. Russell George reported that as of mid-October 2011 only 309,000 taxpayers had claimed the credit, for a total payout of $416 million — far below the 4.4 million the IRS thought would be eligible or the CBO estimate of $2 billion that would be paid out in 2010 alone.

Why so few? Patricia Thompson of the American Institute of CPAs explained that this tax credit violated all of the organization’s six principles for sound tax policy:

  1. Seek the simplest approach
  2. Minimize compliance burdens
  3. Reduce the frequency of tax law changes
  4. Use common definitions
  5. Consider the administrative burden (on tax agencies)
  6. Avoid limited applicability

In fact, the small business tax credit is astoundingly complicated and opaque. Ms. Thompson testified:

In order for an incentive to be effective, taxpayers must know of its existence, know whether it applies to them and how it applies to them. Since most small employers did not know until the end of the year (or after the year ended when their income tax returns were prepared) whether or not they qualified for the credit, there was no incentive for them to provide health insurance coverage.

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Other witnesses included:

  • Ms. Sarah Hall Ingram, Commissioner of the Tax Exempt/Government Entities Division, Internal Revenue Service,
  • Mr. Todd McCracken, President, National Small Business Association
  • Mr. Matthew Hisel, Co-Director, Home Resource, Missoula, MT

All of this testimony is available at the Ways and Means announcement page for the hearing.

I should also mention that this hearing got virtually no media attention. I was searching for whatever happened to the tax credit and there was exactly one mention of it. That was on a blog run by Barbara Weltman.