This morning, POLITICO reported that three Democratic senators, Ben Nelson (Neb.), Maria Cantwell (Wash.), and Amy Klobuchar (Minn.), sent a letter to Speaker Boehner encouraging the House to pass and send to the Senate a stand-alone bill that would repeal the expansion of 1099 tax form reporting requirements that was enacted as part of the Patient Protection and Affordable Care Act (PPACA). Such an overture from the Democrats was expected because, as I wrote here, the expansion of the 1099 reporting requirements has been attacked by advocates for small business owners as an unwise regulatory burden ever since people figured out it was part of the PPACA. In response to the uproar, lawmakers from both parties have been talking a good game about repeal of the 1099 provision for months now. A few lawmakers have introduced legislation to repeal or scale back the measure, though none have been successful.
On reading this news, my first reaction was to be optimistic that we’ve moved one step closer to giving small businesses a needed break in the middle of the struggling economic recovery.
Then I began to consider the legislative and political strategy that Republicans on the Hill are no doubt considering for the 1099 reporting expansion repeal. And I began to get a little nervous. Because getting clever on the strategy for 1099 repeal runs some risks, in terms of good policy and smart politics. At the most benign, Republicans could flub an opportunity to send a clear, strong message to small business owners. At worst, the GOP comes off to small business owners, some of whose votes are up for grabs in 2012, as indifferent to their cause, all the while failing to reform an economic policy that is arguably producing a continuing drag on the economic recovery.
So consider this my plea to the Republican leadership and their legislative aides: Weigh the tradeoffs in how you approach the 1099 reporting expansion repeal carefully. Then weigh them again. Measure twice, cut once on this one, ladies and gentlemen.
The Republicans are no doubt tempted to continue to use the 1099 reporting expansion repeal to try to make additional ground on policy and score political points. Since the passage of the PPACA, both parties have been playing politics with the repeal in both the House and Senate. The repeal measure has been added to other measures, amendments have been added to the repeal measure, and different schemes for offsetting (or not offsetting) the cost of the repeal have been introduced. Each time, these combinations have lost the votes of enough lawmakers to kill the repeal of the 1099 provision. The Republicans even blocked a Democratic attempt to add the repeal to the December tax cut deal, citing a hardline against “Christmas tree” add-ons to the legislation.
I expect that the conversations among Republicans about how to approach the 1099 reporting expansion repeal in the 112th Congress are coming around to the following idea. Since we know we can get Democrats to vote for this in large numbers, maybe we should skip the stand-alone measure and package it with another PPACA provision that we’d like to repeal.
There are a couple of ways such a legislative package could be put together. One would be to partner the 1099 reporting expansion repeal with some repeal most of the Democrats won’t support, like repeal of the individual mandate. This would leave Democrats to vote nay on the legislation. Republicans could then use this as a campaign issue, claiming that Democrats won’t help small business, even in the midst of a sputtering economic recovery. This type of package still gets through the House because 218 Republicans will vote for it, but it crashes and burns in the Senate. Or, two, Republicans could try to use the appeal of the 1099 reporting expansion repeal to eke out repeal of some provision on which they still need to pick up support from Democratic senators. Maybe it’s the repeal of the CLASS (long-term care insurance) Act. If there are moderate Democrats who are swingable on the CLASS Act repeal, attaching it to the 1099 reporting expansion repeal might bring them over to a yea vote.
Let me take a step back here to say that, sure, it’s generally a good idea to structure a tax code to get taxpayers to actually pay the taxes they owe. An expansion of the 1099 reporting requirement is designed to do that. The CBO estimated that the tax code changes would bring in an additional $19 billion in otherwise uncollected taxes over 10 years, although this figure is considered to be an overestimate by some analysts. In fact, the idea of expanding the 1099 reporting requirements was considered by the Bush Administration for just this purpose. The pre-PPACA tax code on 1099 reporting creates a lot of confusion about when 1099 reporting is required. This confusion centers mainly on the exclusion of transactions with corporations from 1099 requirements. (For those of us who don’t fill out a lot of 1099 forms, it turns out that knowing if you’re doing business with a legally defined corporation instead of an individual or partnership is not as straightforward as you’d think it would be.) Under the PPACA, the 1099 reporting requirements are expanded to included transactions with corporations.
On one hand, this is a welcome simplification of the tax code designed to help the IRS collect the revenue that taxpayers should be paying under current tax law. And the IRS has authority under the law to write the rules in a way that would make things less onerous for everyone involved. The written rules would likely ease the reporting burden somewhat because the IRS - for all its charms - doesn’t want a reporting barrage it can’t handle. There’s also time to sort this out because the reporting requirements don’t go into effect until 2012.
On the other hand, the law produces a lot more paperwork for businesses. In addition to requiring reporting of transactions with corporations, the PPACA 1099 reporting provision added the requirement that businesses report purchased goods, not just services. (It is worth noting that the much-bemoaned $600 threshold was already in the tax code.) The best, non-partisan explanation I’ve read about changes to the tax code related to 1099 forms and what they are likely to mean for small business owners was written by an accountant. You can check it out here.
That said, the middle of a weak economic recovery is not the time to increase the regulatory burden on small businesses without good reason. Or, more to the point, this is not the time to pass a law that might bring in $19 billion over 10 years but that gives small business owners the idea that they can’t afford to hire people to make goods and provide services because they need to pay people to fill out tax forms, and, ahem, pay taxes they maybe should have been paying all along.
We could argue all day about how much the increased regulatory burden perceived by small businesses will be real and how much is imagined. We could all put on our green visors and draft a revised expansion of the 1099 reporting requirement that we think would be more efficient and better public policy than the one contained in the PPACA. But that bottom line is that small business owners are hearing from all sides that expanded 1099 reporting requirements will be a drag on their operations and will cost them time and money. It doesn’t help matters when the National Taxpayer Advocate, Nina Olsen, is issuing statements that the increased paperwork and administrative requirements the provision puts on businesses “may turn out to be disproportionate” to any improvement in tax collection rates created.
At this point, you might be thinking that I worry too much and that I’m advocating unnecessary caution. After all, if the Republicans attach the repeal to other measures and the 1099 repeal dies, the House can eventually reintroduce a stand-alone measure. And, hey, there’s nearly a full year until the reporting requirements take effect.
But, at some point, holding the 1099 reporting expansion repeal hostage is not good policy or good politics. Although the Republicans can’t stop Democratic efforts in the Senate to block passage of a stand-alone measure, maybe it’s time that the Republicans sent a message to small business owners about their seriousness of purpose on economic growth. In the universe of regulatory requirements, the PPACA expansion of the 1099 reporting requirements might seem like small potatoes. Yet, for small business owners, who hold votes that lawmakers covet and the power to do hiring the economy needs, a quick repeal of expanded 1099 reporting requirements might be just the message they need to hear.