There is an absurd report out today from Families USA which breathlessly states that, "3.2 million small businesses, employing 19.3 million workers across the nation, will be eligible for [a small business tax credit under Obamacare]."

Note the word, "eligible."  Meaning, that this many businesses can claim this tax credit.  Whether many actually will is another question.

The credit in question is a byzantine and confusing provision which most small employers won't try to use.  It involves far too much recordkeeping and effort, and isn't very lucrative compared to simply deducting employee health insurance premiums from taxable income.  The credit is worth 35 percent of health insurance premiums paid, but this is an equal dollar amount to a small employer in the 35 percent tax bracket deducting those costs as a business expense against taxable income (which requires far less effort to do).  The credit gets more generous in 2014, but still is only slightly better than an ordinary deduction (when state income taxes are factored in), and would not justify the extra paperwork.

The IRS suspects that few eligible employers will be claiming this credit.  That's why they put out a press release in the middle of tax season practically begging employers to use the unworkable credit.  This was echoed by Kathleen Sebelius' Department of Health and Human Services.  Clearly, the Obama folks are worried that their fig leaf of tax relief for small employers is getting teenier by the day.

They have good reason to be worried.  The Congressional Budget Office recently revised their estimate of how much Obamacare will cost the American people.  As part of that revision, they cut in half the estimated utilization of the credit, from $40 billion over the decade originally to $20 billion now.  Since very few employers seem interested in using this credit, expect a future score to be much closer to $0.

Small employers aren't ignored by the healthcare law, however.  They can look forward to a costly employer mandate, or a tax fine of $2000 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.

Saying 3.2 million small employers are eligible for this tax credit is like saying 300 million Americans are eligible to read "War and Peace" in the next year.  Very few will actually read that book, and almost no small employers will be claiming this tax credit which was seemingly designed to fail.

Posted by Ryan Ellis on Wednesday, May 9, 2012 3:18 PM EDT

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