The Senate failed today to repeal one of the more troublesome provisions of Obamacare. Tucked away in the legislation that made Obamacare into law is a tax provision that will be a compliance nightmare for businesses when it goes into effect in 2012.
The provision calls for all businesses to file 1099 forms with the IRS for all transactions with other businesses over $600. This new requirement will force businesses to divert scarce resources to complying with additional bureaucratic red tape that they could better use creating new jobs.
The Wall Street Journal offers a telling example of just how burdensome the 1099 provision will be:
Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations’ corporate parents.
Senator Bill Nelson (D–FL) offered the bill the Senate failed to pass today. The bill raises the $600 reporting threshold to $5,000 and exempts all businesses with fewer than 25 employees from the requirement. Nelson’s plan would also have raised taxes on oil and gas companies to offset the cost.
This half-measure would not have undone all the damage the 1099 requirement will inflict on businesses and the economy. Congress should repeal the entire 1099 provision and should not raise other taxes to offset the cost.
The 1099 reporting requirement is based on flawed logic. Congress believes that the 1099 reporting requirement will compel businesses to report more income to the IRS because they will all of a sudden either recognize income they were not reporting before or feel it necessary to report income they were sheltering from taxation. More reporting will not bring in more revenue because Congress overestimates how much income businesses overlook or shelter from tax.
In reality, the 1099 reporting requirement will raise little, if any, revenue. It is phantom revenue that will likely never materialize, so attempting to offset it is unnecessary.
A better alternative to the Nelson plan is a bill sponsored by Senator Mike Johanns (R–NE) that would repeal the 1099 provision altogether. The Johanns plan is not perfect, though, because it goes through the unnecessary step of offsetting the phantom revenue the 1099 provision was never going to raise.
Nevertheless, it would remove entirely the painful burden the 1099 requirement will inflict on businesses. When the Senate revisits this issue, it should only consider plans that repeal the 1099 reporting requirement completely.