Business Corner

Congress debates tax changes for small biz health coverage

Reprinted from Small Business Tax News

Federal policymakers continue brainstorming for ways to increase health insurance coverage for small businesses, their employees and the self-employed.

Late in October, the Senate Finance Committee held a hearing to explore some of the options. “Many proposals to assist small business employees share common elements,” said committee chairman Sen. Max Baucus, D-MT. “They include a tax credit to help defray costs. They include a mechanism to provide more insurance options that are meaningful and affordable. And they include opportunities to pool risk across state lines. As usual, the devil is in the details.”

Baucus is also concerned about the self-employed. “The special concerns of the self-employed will be an important part of small business health reform,” he continued, but added: “A tax credit or other financial assistance for a self-employed person is useful only if coverage is available,” underscoring some of the complexity inherent in the debate.

The problem of the uninsured is most acute among employees of small businesses, according to Sen. Chuck Grassley, R-IA, the ranking minority member on the panel. “On average, about two in five small businesses do not offer health insurance,” Grassley said. “That means that a substantial percentage of small business employees are without employer-provided health coverage.”

As Grassley sees it, one way to improve the nation’s current health care system is by changing the tax treatment of health insurance so as to “level the playing field.”

“This can be done by addressing the tax inequities between taxpayers who receive health coverage through their employers and those workers who do not receive employer-provided coverage or folks who are not employed,” he continued.

“For those taxpayers who receive employer-provided coverage, the current exclusion for such health coverage is regressive,” Grassley said. “That is, low-income workers with no tax liability get no benefit from the exclusion, and the exclusion is more valuable to taxpayers in higher tax brackets as compared to lower-to-middle income workers.”

But Grassley wants Congress to tread lightly. “Changes in the tax treatment of health insurance must be done in a way that does not disrupt the current employer-based system,” he said.

Monty Newman, a realtor from Hobbs, NM, and a volunteer vice president of the National Association of Realtors, lamented his industry’s lack of affordable health insurance, and told lawmakers that “the plague of uninsured workers will persist unless and until there are corrections and improvements to both the individual and small-group health insurance markets. We believe that tax incentives for the self-employed and for small employers, coupled with mechanisms that would create insurance coverage gateways and/or additional pooling mechanisms would form a far more rational and effective system than current law.”

Dan Danner, executive vice president of the National Federal of Independent Business, encouraged lawmakers to focus on tax-based incentives, along with pooling and cost-containment measures. “Rather than continue to rely on a tax system that primarily benefits those who obtain their health care in the employer-based system, we need a tax system that offers the same incentives to everyone purchasing health care,” Danner said.

NFIB is considering several different tax proposals with various combinations of tax credits and deductions. But Danner said that for any tax incentive to be effective for small-business owners, it must be easy to administer. “Complicated deductions and credits lead to increased errors and less willingness by small employers to take advantage of them,” Danner said. “A simple tax incentive can help to facilitate the goal of encouraging health care coverage.”

Linda Blumberg, principal researcher for The Urban Institute, echoed some of Grassley’s sentiments, saying “serious consideration should be given to a redistribution of the current tax exemption for employer-sponsored insurance.” The level of this expenditure is sufficient to finance comprehensive health care reform, she added, but warned, “Any changes to the current tax treatment can be highly disruptive to the existing system of employer-based health insurance, and so must be preceded with significant reforms to the private individual health insurance market to ensure that access to insurance coverage for those already insured not be adversely affected.”

Committee chair Baucus has yet to introduce any legislation in this Congress to address the problem, but he outlined a few parameters likely to show up when he does. “A bill that comes out of this committee should provide more insurance options to the self-employed,” he said. “And it should also make sure that this insurance offers real coverage that is worth the money.”

Reprinted with permission of Small Business Tax News, Copyright 2007, 1-301-951-1240. This information is distributed with the understanding that the editor and publisher are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Reprinted from Central Vac Professional, December 2007