By Jayme Mendenhall
The Second Wave: Obamacare
There are over twenty new or higher taxes in Obamacare. Not all of them even relate to health care. But all of them will have a dire impact on small businesses and our way of life. Several will go into effect on January 1, 2011.
A business owner and his employees will have to purchase unlimited lifetime coverage and unlimited annual coverage (this requirement phases in between now and 2014). The Obama administration estimates that these mandates alone could increase premiums for some businesses by 7 percent. (And if it is a government estimate, then you know it is low).
He and his employees will have to purchase coverage for dependent children without any waiting periods for pre-existing conditions. Another mandate will require them to purchase coverage for dependents up to age 26. One private estimate puts the cost of this “slacker” mandate an average of 2 percent, but a small-business owner’s premiums may rise even more. Adversely, the cost may force him to drop dependent coverage entirely.
If his health plan loses its “grandfathered” status (really, what are the odds?) he and his workers will have to purchase 100-percent coverage for a long list of preventive services. The administration estimates this mandate will increase premiums on average by 1.5 percent. (Private estimates are in the range of 3-4 percent.) According to HHS, these added costs will likely push the small-business owner to change health plans to a plan that complies with the mandates, but tightens restrictions on accessing care.
Owners of health savings account (HSA), medical savings account (MSA), flexible spending account (FSA), or health reimbursement arrangement (HRA), will lose the ability to purchase over-the-counter drugs tax-free (except insulin). If they make non-medical withdrawals from their HSA or MSA, the penalty will double from 10 percent to 20 percent.
The “Special Needs Kids Tax” provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (currently, there is no federal government limit). FSA owners for whom this new cap will be particularly cruel: parents of special needs children. Thousands of families with special needs children in the United States use FSAs to pay for special needs education. This will no longer be permitted.
If the small business is a tanning salon, it is already paying a new 10-percent tax on its sales.
Beginning in 2010, one third of small businesses may be able to get a tax credit that covers up to 35 percent of their health-benefits. Of course, that credit is not a long-term solution to rising costs; it disappears after 6 years and often sooner. It will also discourage hiring, because hiring too many workers will reduce or eliminate the credit.
By 2013, all businesses will have to fill out an IRS Form 1099 every time they purchase more than $600 from a vendor. If a small-business owner owns a trucking company, he will have to ask gas stations for their tax ID numbers. If the gas stations don’t cooperate, he will have to withhold money and send it to the IRS for gas expenses. This will be the biggest nightmare in the bill for small businesses.
If a small-business owner and his wife make over $250,000, they’ll pay the new, higher Medicare “payroll” tax of 3.8 percent, starting in 2013. (It’s currently 2.9 percent).
2014 is when things really get messy. That is when the government will require everyone that is still in business to purchase even more unspecified types of coverage, which will cause premiums to rise even higher.
If a small-business owner has 50 or more employees – or fewer full-time employees and lots of part-timers – he faces the prospect of tens of thousands of dollars in penalties under ObamaCare’s employer mandate if he does not provide “adequate” coverage to his workers. A small-business owner with 55 employees may decide to fire six of them just to eliminate that potential liability.
Penalties may be triggered by factors that are unpredictable and totally beyond the control of a small-business owner. He could get hit with penalties simply because a worker’s spouse loses or changes jobs; if a worker’s spouse moves out or dies; or if an employee’s parents move in.
If a small-business owner splits his 60-employee business into two 30-employee businesses, then the federal government—maybe the IRS—will start snooping around to determine whether it was done for legitimate business reasons or just to avoid the mandate.
No matter the size of the firm, if the owner or his workers earn around $30,000 to $100,000 and get coverage through one of the new health insurance exchanges, their implicit marginal tax rates will jump from about 30-40 percent all the way up to 60-75 percent!
ObamaCare has created enormous uncertainty. No one has any idea what ObamaCare’s mandates will cost in 2011, 2012, 2013, or 2014 or what additional benefits will be required. It is also unknown what kind of insurance options will be available in the future. All that is known is that these changes will cost more – probably a lot more – and small-businesses will be spending extra time and money on tax accountants and attorneys.
Michael F. Cannon is director of health policy studies at the Cato Institute.