NCPA - National Center for Policy Analysis


January 13, 2010

While the nation's unemployment rate continues to linger around 10 percent, Congress will soon return to Washington to devise a way to get a health care bill passed by both the House and Senate.  As the negotiations loom, a recent paper by Heritage Foundation's John Ligon explores the devastating effects that the employer mandate in the House health care bill would have for small business.

In order to pressure more businesses into providing health care for their employees, the House bill includes an incremental payroll tax on employers that fail to do so:

  • This tax starts at 2 percent for employers with total annual payroll of $500,000 and increases to 8 percent on total annual payroll of $750,000 or more.
  • This tax would affect all employers, even those with 25 employees or fewer, since it is based on total payroll, not number of employees.

This tax will add significantly to small business expenditures, regardless of whether they choose to offer health benefits to their employees or not:

  • According to the bill, if employers do offer benefits, they cannot come out of employee's wages, and they must meet the federal requirements concerning covered benefits.
  • If they choose not to add health care to their expenses, small businesses will instead pay the tax.

However, the structure of the tax causes it to go further than acting simply as an incentive to offer health benefits to employees.  Ligon writes: "the employer mandate structure in the House-passed health care bill would create a strong disincentive for a business to expand compensation or even acquire new workers."  This is because, as a business nears a higher payroll bracket, it also risks spending a much higher percentage of its earnings to pay the penalty tax.  For example, an employer with total payroll of $499,999 would have paying a $10,000 penalty if it increased its payroll just one dollar.  Undoubtedly, this would cause any small business owner to reconsider before offering bonuses or wage increases to its workers.

Source: Kathryn Nix, "The House Health Care Bill: Sticking it to Small Business," Heritage Foundation, January 12, 2010.


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