Health-care funding provision could face repeal

By N.C. Aizenman
Washington Post Staff Writer
Sunday, August 29, 2010; A4

Five months after the adoption of the sweeping new health-care law, momentum is building to modify and possibly repeal one of its funding sources. The sums in question are small in comparison with the total trillion-dollar tab for the health-care overhaul, but some see the move as an opening for further changes to a law Democrats had been determined to leave untouched.

The provision, which takes effect next year, will require businesses to file 1099 tax forms reporting any purchases they make of goods or services above $600 from any individual or business, including corporations. Currently, businesses only need to file 1099s when they buy services - and only when the vendor is an unincorporated person or business.

The move - designed to clamp down on tax evasion- was projected to raise $17.1 billion over 10 years toward the cost of the health-care law.

But the measure has prompted alarm from small businesses, who complain that it could prove exceedingly labor-intensive and expensive.

Members of Congress from both parties have taken notice, and the Senate is scheduled to vote Sept. 14 on two amendments to an unrelated bill: One would eliminate the 1099 provision; the other would exempt businesses with fewer than 25 employees, raise the reporting threshold to purchases above $5,000, and exclude those made with a credit card. A 60-vote majority would be required in both cases.

Democrats contend that this represents the usual tweaking of major new statutes and say even removing the 1099 provision would not mark a step toward repealing the larger law because the 1099 measure doesn't directly involve the health-care system.

But Douglas Holtz-Eakin, a former Congressional Budget Office director and top economic adviser to John McCain's presidential campaign, warned, "I think this is the first of many provisions of this legislation people will find to be unworkable in practice - we're going to see more of this."

The 1099 measure attracted little attention during the months-long health-care debate. As far back as 2007, President George W. Bush's administration and Senate Finance Committee Chairman Max Baucus (D-Mont.) discussed proposals for closing the estimated $345 billion annual federal tax gap - the difference between taxes owed and taxes paid. So in spring 2009, as Baucus and others were looking for ways to offset the cost of the health-care bill, the 1099 provision offered a ready answer.

It wasn't until after the new law was adopted, as business groups started holding meetings to tease out the practical implications, that the outcry over the 1099 provision erupted.

"I've never seen an issue resonate so deeply in the minds of small-business owners," said Giovanni Coratolo, a vice president of the U.S. Chamber of Commerce.

To what extent the concern is warranted is difficult to say.

An IRS ombudsman estimated that 40 million businesses, including 26 million sole proprietors, will be affected. Chris Walters of the National Federation of Independent Business pointed to owners such as Pat Felder of Baton Rouge, who estimates that her auto parts supply business will have to start filing 1099s on several hundred vendors - including office supply stores, gas stations, even the grocery where she gets meat for company barbecues.

Felder, who employees 25 workers, said she'll have to hire one more just to keep track of receipts. At $30,000, the extra salary will eat into about 6 percent of her profit. "You plow every penny you can right back into the business," she said. "When I think of everything else I could use that money for, it's huge."

Critics also say it's unclear whether the extra effort will actually help close the tax gap given the challenges of squaring vendors' tax returns with the inevitably different 1099s filed by their business customers.

But a Senate Democratic aide countered that the IRS need not pore over 1099s in search of cheats for the new provision to be effective. The mere fact that vendors know their customers are filing 1099s to the IRS - and providing them with copies - will help vendors keep better records of their income and provide a powerful incentive to fully report it.

Nonetheless, Democratic lawmakers have made clear they are open to at least modifying the 1099 provision. And many are pushing as hard as Republicans to repeal it.

For all the bipartisan consensus, the odds of Congressional action before the November election appear low.

In the House, Democratic leaders squelched an effort by Rep. Dave Camp (R-Mich.) last month to put forth a bill repealing the 1099 provision. Camp would have offset the cost by requiring low-income people to return a larger share of the subsidy they get to buy health insurance in cases where the government mistakenly overpaid them.

Democratic leaders offered an alternative that would have paid for the 1099 repeal by eliminating tax breaks on companies operating internationally - a move unpalatable to most Republicans. The resulting, almost party-line, vote of 241 in favor to 154 opposed was insufficient due to its timing: With the House about to adjourn for summer recess, the bill could only be considered under a "suspension of the rules" requiring a two-thirds vote.

Rep. Scott Murphy (D-N.Y.) has pressed House Majority Leader Steny Hoyer (Md.) to schedule a vote requiring only a simple majority when the House reconvenes. But with Democrats already on record voting to repeal the 1099 provision, the leadership may have less incentive to squeeze a second vote into the pre-election calendar.

Meanwhile, in the Senate, the amendment to repeal the 1099 provision, sponsored by Sen. Mike Johanns (R-Neb.), may turn off Democrats because it would offset the cost by delaying use of a $15 billion fund for preventive health projects and allowing more people to opt out of buying health insurance.

The more modest alternative - offered by Sen. Ben Nelson (D-Neb.) - is a deal killer for many Republicans and even Democrats because it stops short of repeal and offsets the cost by eliminating tax breaks for certain oil companies.

Still, said Coratolo, "The Democrats are really fearful this will become the poster child of the health-care bill. . . . I would be surprised if this wasn't repealed within the year."

The question for supporters of the new health-care law is whether it all ends there.

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