One of the crises with tax breaks is their tendency to end, as is the case with the recently passed small business health insurance tax credit (S.L. 2006-66), set to expire on January 1, 2009. Most businesses think farther ahead than the next couple of years. If a tax break will allow them to take on new permanent expenditures, but the tax break is set to end in a year or two, then they will very often choose to do nothing. In this case, only a permanent tax cut may have the desired effect.
The idea of offering businesses incentives to insure their employees, however, raises a deeper question. The U.S. tax system favors employer-based insurance. For example, a recent study by the National Center for Policy Analysis shows that private individuals only pay 14 percent of total health costs out of pocket. This fact likely motivates some people to obtain healthcare services they don’t really need. The tax system contributes to this over-consumption by favoring employer-based, employer-paid insurance plans. At the same time, the U.S. tax system discourages consumers from shopping around for more affordable plans. With less competition, prices (insurance premiums) inevitably become higher.
A better way to help small businesses buy coverage for their employees is to create a national health insurance market. Senator Mike Enzi (R-WY) has proposed legislation that would permit the creation of a national market where small businesses can pool together and buy health insurance. This could also be done at the state level. If North Carolina lifts the coverage mandates that it imposes on private health plans, and allows small businesses to buy health insurance nationally, the price of premiums will come down and each company will be able to find a plan that meets its specific needs and budget.