Tuesday, April 20, 2010

Government Tilting the Playing Field

Got a postcard from the IRS to my small business today touting "the recently enacted Patient Protection and Affordable Care Act", saying that it "could earn you a new tax credit this year for providing health insurance for your employees."

On the reverse, it explains that "eligible small employers could qualify for a credit worth up to 35% of premiums paid in 2010 (for businesses) or 25% of premiums paid (for tax-exempt groups)."

In order to qualify, I must have fewer than 25 employees (more if I have part-time employees), and less than $50,000 in average wages.

Here's my complaint:

My small business (a veterinary hospital) will be open four years in September. We have around ten employees, split around 50-50 between full and part time. This is the minimum staffing for our business to provide the required standard of care, whether we see patients or not (i.e., whether we have revenue or not). Thanks to an unforseen and powerful recession, our profit is less than one week's revenue and incredibly unstable.

My wife is the chief doctor and receives no compensation yet. (No stable, significant profit means no compensation for the doctor-owner). Our second doctor is compensated according to industry standards (approximately 25% of gross production). Our staff is provided a steady number of hours each week at competitive wages to honor their need to keep on budget at home. We provide time off for full-time employees, and hospital discounts for all employees.

The thing is, not one of our employees wants a group health plan. Some are covered under spousal health insurance plans. At least one detests being in a group plan for the extra expense brought by other employees, and so has an individual plan of her own choosing. Our solution is to pay a cash benefit to full-time employees to help cover the costs of health care. There is a provision in the federal tax code that allows this to be tax-free to employees under specific circumstances, otherwise it is treated as additional wages.

Here's the problem: The tax credit offered by the Act does not apply to my business!

How does this tilt the playing field? My competitors who are larger and have group health insurance plans will have a major labor expense subsidized.

I cannot and will not force my employees into a group health plan in order to get this tax credit. They don't want it. It would be an affront to their individual liberty to do so, would be unethical on my part, and would likely be illegal under state and federal law.

Through no action or inaction of my own, my competitors will receive thousands of dollars in subsidies to provide a benefit they already provide out of revenues. In times of rising medical supply costs (even for veterinary hospitals), this subsidy will allow my competitors to consider passing on fewer of these cost increases in their prices. At best, it will provide additional income to the owners at taxpayer expense.

This hardly seems the object of the Patient Protection and Affordable Care Act. Yet it is a foreseen (and foreseeable) consequence. The federal government wields blunt instruments.

Our situation is but one of many unintended consequences of governments of all levels intervening in the marketplace. Even local government is not immune to tilting the playing field.

Dan Telvock, writing in his blog on Fredericksburg.com on March 24th and in later posts, details how yet another company is being offered multi-year tax rebates simply for locating in the county. What a slap in the face to the rest of us who have already located businesses in the county! Are the jobs we create less valuable than the jobs another company brings in?

Economists will call this creating incentives at the margin, but there are costs to these incentives. In this case, local government is taking a lot of "little bits" from me and many others to give "a lot of" preferential benefit to one private entity. Furthermore, it arouses ill-will in the existing business community. What assurance do we have that the deal is being considered solely on merit? There can be none!

In truth, the playing field has been crumpled and tilted in so many ways, that it is impossible to know whether the net benefit to my business is more or less than it would be if the field were level. The fact that the situation is so obscure makes possible rent-seeking by lobbyists and "good ole boys". In plain language, it is easier to hide gains from having the field tilted in your direction.

After all, what the public does not know cannot hurt them, right?

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