I think that the main reason why Jimmy (and by extension,Paulie) wanted to whack Henry was that even though Hill was a small timer
as far as the drug business,it was still the drug business. If you remember, in the film,and the book as well,Paulie was obsessed with not going to prison on a drug conspiracy charge,like his buddy Gribbs.

I think a case could be made that precisely because Henry was a nobody in the Mob,he wouldn't have a whole lot of leverage with the Feds. In Paulie's mind,implicating Paulie and Jimmy in the drug trade could have given Henry a bargaining chip. And even though Paulie had no knowledge of Henry's dealing,and would have never condoned it,Paulie's got to figure,why take the risk?