Elizabeth Warren’s plan for financing “Medicare for all” could have the unintended consequence of giving small businesses an advantage over rivals if they keep their employee headcount below 50.
The wrinkle in the plan comes from a provision requiring small businesses that meet or exceed the 50-employee threshold to make “Employer Medicare Contributions” equal to the national average cost of healthcare per employee for every employee at that company — about $15,000, according to the National Business Group on Health’s 2019 survey.
That feature would give small businesses with fewer than 50 employees a significant advantage because their employees would all have health insurance via the federal government, but they would not have to pay the “Medicare contribution.” Meanwhile, rivals with more than 50 employees would have to pay the tax.
The effect would be that firms with fewer than 50 employees would be able to pay higher wages than competitors over the 50-employee threshold, incentivizing them not to grow above that size.
“Earlier employers could give lower wages to give [employees] insurance, but now the government is providing the insurance regardless of someone’s job, and so that decreases the value of what companies are giving employees,” said Leonard Burman, a tax expert at the nonpartisan Tax Policy Center.
The Warren campaign has portrayed the competitive advantage the plan would bestow on small businesses as one of the benefits of the sweeping overhaul.
“Small businesses — who often suffer when competing for employees because they can’t afford to offer health care coverage — would no longer be at a competitive disadvantage against bigger businesses,” the campaign boasts in its description of the financing plan. (The Warren campaign declined to comment on the record for this story.)
Yet that feature of the plan would be a curse, rather than a blessing, for businesses near the 50-employee threshold that would like to expand.
“Everyone will do everything possible to not hit the [50-person] threshold,” said Jason Duff, CEO of Small Nation, which owns a number of small businesses in Bellefontaine, Ohio.
“The idea of growth and getting bigger as you get more successful will be diminished, and that’s unfortunate,” said Duff. Duff said he spends about $400,000 on healthcare for 25 employees, which is approximately 15-20% of his annual budget.
The major problem entailed by the provision is that it would not be just a marginal tax on the 50th employee, but instead would apply to all previously hired employees. “If you hit the 50-employee threshold, then all of a sudden you’re hit with like a $500,000 tax,” said Burman. “That 50th employee would have to be a really great employee to justify hiring them!”
Obamacare also created an analogous set of incentives, but at a smaller scale, by requiring employers with more than 50 full-time employees to offer health insurance coverage or pay penalties. Critics argued that the Obamacare policy created an incentive for businesses to shift some employees from full-time to part-time. But it did not give smaller competitors the competitive advantage the Warren plan would.
One possible effect of the Warren Medicare tax provision, Burman said, would be that companies would divide themselves up into “small 49 person pods to avoid the tax levy.” For employers with more than 50 employees who already offer health insurance, the Warren plan would require them to contribute 98% of what they currently spend on employee healthcare to the Medicare fund.
Burman further said that Warren’s plan would be “a great deal for robots because robots aren’t affected by this tax.”
Warren’s plan would also effectively penalize companies for offering more generous health insurance. Because it would calculate a company’s healthcare tax based on the amount it paid in healthcare costs for their employees in the years before the plan is enacted, the tax would be higher for small businesses that offered insurance when they didn’t have to, or that offered more generous insurance.
Brian Riedl, a fiscal expert with the conservative Manhattan Institute, told Washington Examiner that the structure of the tax would mean “punishing generosity.”
“It might be smart for companies to cut back on health benefits, it might be in their best interest to cut down their [health] premiums now so they can have a lower tax bill in the future, in anticipation of the law,” he said.
There are some ways that Warren’s healthcare guarantee could be advantageous to employees, though.
“It would allow employees to move in and out of labor market flexibly,” said Marc Goldwein, senior policy director for the nonpartisan Committee for a Responsible Federal Budget. “Without having to worry about losing health insurance, they could jump between companies more easily and find a job that’s better suited to them.”
Warren’s plan also highlights that it would create a “significant new incentive for unionization” because employers who offer health benefits under a ‘collective bargaining agreement’ though a union will be able to reduce their tax burden under her plan.