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ObamaCare: Penalizing Small Businesses for Creating Jobs and Raising Wages

Last Thursday, President Obama issued a presidential proclamation declaring this week “Small Business Week.” The presidential proclamation accurately describes small businesses as the “backbone of our Nation's economy” that “employ tens of millions of workers” and create the “majority of new private sector jobs.” 

At a time when the national unemployment rate stands at 9.9 percent and an estimated 15.3 million Americans are looking for work, policymakers should be encouraging small businesses to grow and create jobs. However, a new study reports ObamaCare – after mandating small businesses provide health care to their employees – actually penalizes small business owners who hire more workers or increase their workers’ wages. 

“The landmark health reform law signed by President Obama will require small businesses to provide health insurance to their employees. This burden will be offset by a tax credit for each employee covered. However, the credit is arbitrarily reduced as firms grow, penalizing employers that hire more workers or increase their salaries. Thus, the credit may discourage firms from hiring more workers or higher-paid workers… The legislation presents firms with the biggest obstacle to job growth when they want to expand beyond a certain size. … 

The employer mandate for low wage workers will cause some employers to substitute capital for labor and more highly skilled workers for less skilled ones. Thus, instead of hiring ditch diggers and giving each one a shovel, an employer might buy a backhoe and hire a more highly skilled operator. An unintended consequence of the law is that some low wage workers will be unemployed who otherwise would not be.

(Devon Herrick and Pamela Villarreal, “Obama’s Tax on Job Creation,” National Center for Policy Analysis, 5/18/2010) 

“Bill Rys, tax counsel at the National Federation of Independent Businesses, told The Hill that while demand is the primary driver for hiring decisions, costs related to new hires is a key factor. ‘To the extent that a tax credit is related to the benefits that you’re paying your employees, it is going to be a factor in determining what is the cost of the employee,’ he said. ‘The fact that you’re losing a portion of the credit because you brought in a new employee is going to have to factor into the cost of who you’re hiring.'"

(Jay Heflin, “Report: Healthcare law tax credits encourage small businesses to stay small, not hire,” The Hill, 5/23/2010)

In his proclamation, President Obama called upon all Americans to “recognize the tremendous contributions of small businesses to our Nation with appropriate programs and activities.” A good place to start is to repeal ObamaCare and replace it with commonsense solutions that expand access without raising taxes on America’s job creators.