NCPA - National Center for Policy Analysis

Effects of Health Insurance Premium Tax on Small Businesses and their Employees

November 17, 2011

The Patient Protection and Affordable Care Act (PPACA) signed into law in 2010 included, as one of its revenue-raisers, a health insurance (HI) premium tax structured as an annual fee on insurers beginning in 2014.  The tax, which will obtain a preset amount of revenue each year, applies to any U.S. health insurance provider as they provide services to corporations and households.  However, many researchers, including analysts at the Congressional Budget Office, recognize that in response to the tax many health insurance providers will pass their costs onto their subscribers, thereby placing a significant burden on businesses that provide health insurance to their employees, says Michael J. Chow of the National Federation of Independent Business.

  • The tax is intended to collect roughly $90 billion in revenue through 2020, but the pass-on effect will impose this cost on employers and employees, with the bill coming to $5,000 per family.
  • Estimates predict the tax will raise the premiums for employer-sponsored insurance by 2 to 3 percent.
  • Studies indicate that those businesses that do not self-insure will be hardest hit, and with 75 to 85 percent of establishments with fewer than 500 employees opting not to self-insure, it becomes clear that those hit hardest by this policy will be small businesses.
  • With small businesses taking on this significant financial burden, the HI premium tax is forecast to reduce private sector employment by between 150,000 and 249,000 jobs in 2021, depending on the rate of inflation.

The tax burden created by PPACA will fall hardest on small businesses, which is a particularly troubling fact for several reasons.  First, small businesses (unlike their larger counterparts), lack the current savings and access to capital necessary to smoothly transition into the tax.  Therefore, the tax will fall hardest on those least ready to bear it.  Second, because small businesses constitute such a large portion of the workforce, policies that cause their downturn can negatively affect the economy as a whole.

Source: Michael J. Chow, "Effects of the PPACA Health Insurance Premium Tax on Small Businesses and Their Employees," National Federation of Independent Business, November 9, 2011.

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