IRS Admits Obamacare’s Small Business Tax Credits Are a Failure

Published October 11, 2012

One aspect of President Obama’s health care law touted by its supporters is the inclusion of a small business health care tax credit. But recent testimony by a leading bureaucrat at the Internal Revenue Service shows this aspect of Obama’s law, like so many others, is destined to fail.

Small business employers have no incentive to participate in the tax credit plan. In order to comply, a small business owner has to file Form 8941 with the IRS. This 20-line form requires employers to report the number of employees they have, the average amount they are paying them, the total amount spent in premiums on them, and the average premiums for small-group coverage in their area. And that’s just if you have a simple situation.

Alternatively, employers can simply deduct their insurance premiums as a business expense and be done with it. That’s what most, if not all, small employers will continue to do. No small employer will want to compile those records when they can take the easier path.

IRS: It’s Not Our Fault

IRS Deputy Commissioner for Services and Enforcement Steven Miller appeared on Capitol Hill to testify before the House Ways and Means Committee in early September 2012 to give the committee a briefing on how the IRS has been doing implementing Obamacare.

Much of the testimony concerned how the IRS would enforce and process the “individual mandate” to purchase health insurance, which is as the heart of the President’s healthcare law. But an interesting sidebar provided a window into how business is often done in the halls of power in Washington, DC.

On September 11, 2012, IRS Deputy Commissioner for Services and Enforcement Steven Miller testified before the House Ways and Means Committee about the IRS’ implementation of Obamacare. One part of his testimony was actually fairly amusing:

“The IRS conducted an extensive outreach and implementation program for the Small Business Health Care Tax Credit,” Miller said.

According to Miller, “The IRS conducted significant outreach, communication, and educational activities to inform small businesses and tax professionals about the credit. We created a special page on our web site,, just for the Small Business Health Care Tax Credit. From there, taxpayers could use a step-by-step guide to see if they qualified for the credit and how to claim it. There are also links to a Question and Answer section, a special YouTube video, legal guidance, news releases, and information flyers.”

In Washington, DC-speak, that can be summed up rather succinctly: “When this fails, don’t blame us.”

And the credit is failing, because small employers aren’t using it. The Congressional Budget Office downgraded its estimated tax score in half, from $40 billion to $20 billion over the first decade of Obama’s law. The massive public relations blitz this spring by the IRS is more evidence. The final nail in the coffin, though, is Miller’s testimony cited above.

Small Employers Feel Pain, Not Gain

Small employers aren’t ignored by the healthcare law, however. They can look forward to a costly employer mandate, or a tax fine of $2,000 per employee if they don’t comply. They can expect to see their tax rate rise under President Obama’s budget, since he wants to raise the top two marginal tax rates (at which a majority of small employer profits face taxation).

That doesn’t even count the hike in the Medicare tax rate, which falls doubly on the self-employed. If a small employer is in the tanning industry or makes medical devices, there are special new excise taxes just on them.

“It’s more than a little amusing that the IRS is trying to pass the hot potato here,” said Americans for Tax Reform President Grover Norquist. “They have the real-time data which must confirm what the rest of us know to be the case—this unused credit is a fig leaf, covering up the fact that there are 20 new or higher taxes on small employers and families in Obamacare.”

In retrospect, Obama’s law looks more like a collection of fig leafs, disguising pain for Americans.

Ryan Ellis ([email protected]) is tax policy director for Americans for Tax Reform.