Wordsworth: New Laws Mean Fewer Jobs

July 28, 2010
TIMES-DISPATCH
By JIM WORDSWORTH

McLEAN—Although I was pleased to hear President Obama speak in his State of the Union speech about his agenda for creating more jobs, I was stunned when he promptly promoted and signed into law a health care bill that is sure to retard job growth. While the law's costs in dollar terms -- nearly $1 trillion over 10 years -- has been well documented and debated, the hidden, unquantifiable costs associated with job losses and jobs never created are less understood.

The law's mandates, fees, and taxes will discourage small businesses -- society's most prolific job creators -- from adding to payroll and could even incentivize them to shed workers. One of the biggest impediments to job growth is the employer mandate. Beginning in 2014, employers with 50 or more employees that do not offer "qualified" health coverage to their full-time employees must pay a $2,000 fine per employee. It is estimated that nearly 220,000 small businesses employing more than 26 million workers could be subject to this mandate.

Put yourself in the shoes of an owner of a growing small business with fewer than 50 employees. You might think twice before hiring your 50th employee if it means having to face burdensome new federal regulations and pay steep fines.

To me, there are many direct and indirect financial reasons to put my emphasis on tighter management to grow profits and abandon ideas of sales growth and increased employment for now. It is smarter to mechanize where possible, reduce or eliminate products or services that are labor-intensive, or outsource to others where the purchase cost is a direct deductible expense. If we produce in-house, we then incur my labor cost plus employment taxes, plus health care cost. The health care bill alone could actually increase productivity and profits, but at the expense of slowed sales growth and decreased employment. The bill will definitely be a boost to the use of technology and automation.
The foremost goal of forming or growing a company is to make a profit, not just employ people.

In addition, the employer mandate could send additional Americans to the unemployment lines. Pretend you're a small business owner with, say, 60 employees. After doing the math, you might come to the unfortunate conclusion that laying off 10 workers is the only viable option to keep your doors open and lights on. The workers you are forced to lay off will be able to receive health care through the expanded Medicaid program or through government subsidies. But they won't have jobs.

The law's proponents argue that new tax credits for small businesses will cushion the impact of higher costs and ease the reluctance to hire. However, it is widely accepted that these credits will have minimal positive impact. They are limited to firms with 25 or fewer full-time employees, and the size of the credit is phased out as the number of employees and/or average wages increase.

Only businesses that have 10 or fewer employees with average taxable wages of less than $25,000 and that pay 50 percent of the cost of coverage for their workers will qualify for the full small business tax credit. In addition, the tax credits last for only two years once the exchanges are active in 2014. This hardly constitutes a robust economic growth and job creation incentive.

A number of taxes and fees called for in the bill will also throw a wet blanket on job creation. Tens of billions of dollars in new taxes imposed on drug manufacturers, medical device makers, and insurers will be passed on to employers and consumers in the form of higher prices. Small businesses in particular will feel the pinch of $60 billion in fees levied on health insurance companies over 10 years because the law specifically excludes self-insured health plans -- the type that most big businesses and labor unions offer -- from having to pay the tax. New Medicare payroll and investment taxes and the 40 percent tax on Cadillac health plans will also come at a significant cost to job creation and investment.

Small businesses will also be forced to divert precious time and resources to filling out additional government paperwork. The law requires companies to collect data on virtually all business-to-business transactions which aggregate to $600 or more in a year and report it to the IRS. Aside from the obvious pain this requirement inflicts, it will have a chilling effect on economic activity, as many small firms will sever relationships with vendors or refrain from entering into new business arrangements and large firms sever their small business vendors and pick larger national firms, thus easing this new paperwork burden.

Unfortunately, the new health care bill continues to get worse with time. Just recently, the administration issued regulations saying that employer-based health plans could lose their exemption to some provisions if they drop coverage for certain health problems, increase the proportion of insurance paid by employees, cut back by more than 5 percent the share of premiums that the company pays, or significantly increase the annual deductibles or co-payments paid by workers. A fully-insured plan could lose grandfathered status if it changes insurance companies.

So, a small business facing, say, a 15 percent premium hike in its existing plan must decide whether to absorb that additional cost but keep its grandfathered status or switch to another health plan and become subject to all of the law's new costly mandates. No matter what choice it makes, the result will be the same -- fewer resources to create new jobs.

With its overhaul of health care, Congress and the administration ignored America's top priority -- bringing down a nearly 10 percent unemployment rate. Theirs was a monumental mistake that will impair our immediate economic recovery and have negative economic consequences for many years to come.

Jim Wordsworth is the owner of a number of businesses in the hospitality and food services industry in Virginia and is chairman of the Labor Relations Committee and the Council on Small Business for the U.S. Chamber of Commerce.