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Obama's Health-Care Aid to Small Firms Disappoints

Jill Fromer | Photodisc | Getty Images

It seemed like a good idea at the time.

But a health insurance tax credit for small businesses, part of President Barack Obama's health care law that gets strong support in public opinion polls, has turned out to be a disappointment.

Time-consuming to apply for and lacking enough financial reward to make it attractive, the credit was claimed by only 170,300 businesses out of a pool of as many as 4 million potentially eligible companies in 2010.

That's put the Obama administration in the awkward position of asking Congress to help fix the problems by allowing more businesses to qualify and making it simpler to apply.

But Republicans who run the House say they want to repeal what they call "Obamacare," not change it.

"They completely missed the target on this thing," Rep. Sam Graves, R-Mo., said of the tax credit. "I don't think expanding it is going to make any difference whatsoever." Graves chairs the House Small Business Committee.

It doesn't help the administration's plea that the biggest small-business lobbying group is a lead plaintiff asking the Supreme Court to overturn the Affordable Care Act. The National Federation of Independent Business isn't likely to spend much time tinkering with the tax credit or promoting it to members.

Small businesses represent the crumbling edge of the nation's system of employer-based health care. Only about 30 percent of companies with fewer than 10 workers offer health coverage, and they often pay more for insurance than large businesses. The credit, which once had support in principle from lawmakers of both parties, was supposed to help businesses already providing coverage afford the premiums. And maybe it would even entice some to start.

"We agree it is not a panacea for all costs," said John Arensmeyer, founder of Small Business Majority, an advocacy group that supports the health care law and disagrees with the much larger independent business federation. The problem is all the negative publicity around the health care law has discouraged business owners from applying for the credit, he says.

"There has been more heat than light shone on this," Arensmeyer said. "There is no reason why small businesses shouldn't be taking advantage of this credit." About 770,000 workers were covered by the businesses claiming the credit in 2010.

However, a recent report by Congress' nonpartisan Government Accountability Office identified several issues with the credit itself.

To begin with, the GAO said, the tax credit is structured so its biggest benefits go to very small companies paying low wages. About 4 out of 5 such businesses don't offer coverage, and the tax credit is not sufficient to encourage them to start doing so.

"Small employers do not likely view the credit as a big enough incentive to begin offering health insurance," the report said.

The average credit claimed in 2010 was about $2,700, although some companies qualified for much more.

Many small firms did not qualify because they paid fairly decent wages. The GAO report quoted an unidentified tax preparer who explained that "people get excited that they're eligible and then they do the calculations and it's like the bottom just falls out of it and it's not really there." It's almost a bait and switch.

Complexity has been another obstacle. IRS Form 8941, which employers must complete to claim the credit, has 25 lines and seven worksheets, the GAO said. Some tax preparers told the agency it took clients from two to eight hours to pull together supporting information and tax professionals another three to five hours to calculate the credit.

Trying to help, the IRS identified "three simple steps" employers needed to follow, but the GAO found "the three steps become 15 calculations, 11 of which are based on seven worksheets, some of which request multiple columns of information."

Arensmeyer said claiming the credit will be simpler once it becomes standard in tax-preparation software.

As it stands now, the credit is only temporary, expiring in 2016. That's another reason Congress appears unlikely to adopt the administration's proposed fixes, which would cost an estimated $14 billion that has to be offset with cuts elsewhere.

If the health care law withstands Supreme Court scrutiny, more employers could start claiming the credit. Otherwise, it may just go down as a missed opportunity, for policymakers and small-business owners alike.

Email us at SmallBiz@cnbc.com and follow us on Twitter @SmallBizCNBC.

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