Obamacare and Small Firms

WILLIAM DUNKELBERG, THE CHIEF ECONOMIST with the National Federation of Independent Business, is used to being a sorehead when major health-care legislation is offered by Washington. Back in 1993, when then-First Lady Hillary Clinton's health-care bill was in play, a member of the president's Council of Economic Advisors called Dunkelberg to ask why NFIB opposed the bill. Since it specifically exempted most small businesses from having to participate, what possible grounds could the membership have to object?

"I told him," recalls Dunkelberg, "that we object because we're not stupid. Legislation like this proceeds in steps. First, get a bill passed based on fantasy figures about costs and revenues, then face reality and start taxing the groups with the exemptions to make up needed revenue."

Hillarycare was a nightmare from which the country soon awakened; Obamacare has managed to become law. While the new legislation also exempts most small businesses, Dunkelberg is again firmly convinced that the exemptions won't last. And either way, it can't be good for job creation.

Just when a small business gets large enough to no longer be called "small" is arbitrary. The legislation sets the exemption bar at fewer than 50 employees. And it turns out that, based on Bureau of Labor Statistics figures, there were nearly 4.7 million such firms in the U.S. last year, 95% of all private-sector firms. This 95% employed just 31.2 million workers in 2009 (down from 33 million in '07), accounting for 29.4% of all private-sector employment. Not surprisingly, Congressional Budget Office figures show that a disproportionate share of these workers lack health insurance.

[In 2014 the legislation fines firms with 50 employees not offering health insurance]. If Dunkelberg is right, however, then rising costs and shortfalls in revenue could lower the cutoff to 20 employees, or even 10.

The bill has created an unsustainable divide between “haves” and “have nots.” For most workers, the tax subsidies in the exchanges will be higher than the tax subsidies available to employers required to provide coverage. This will induce many employers to drop coverage, pay the penalty and let their workers get a better deal in the exchange (”better deal” only because taxpayers are subsidizing the coverage more).

But the penalty payments won’t cover the required costs of the additional subsidies, so the government likely is going to try and ratchet them up. At which point, big firms will ask the logical question “why do our competitors under 50 employees get so much of a better deal than we do?” Congress wouldn’t be able to afford to either increase subsidies available to large firms OR to reduce their penalty payments to remove the unfair differential. So obviously the only way to make things fair again is by expanding the number of firms forced to offer coverage since that will both reduce the number getting coverage from the exchange and increase the revenues from penalty payments from the firms who elect to ignore the employer mandate.

Small firms were instrumental in defeating Hillarycare. It’s sad they weren’t more potent in opposing Obamacare, as it likely was in their power to do so had they been more united and vocal in their opposition.

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