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Why is this expansion of IRS filings contained in health care reform legislation? Because the additional information flowing into the IRS will help cover the cost of reforms. Expanding the 1099s filed with the IRS is expected to increase tax compliance to the tune of roughly $17-$19 billion — and perhaps more. The IRS estimates that the federal government loses $300 billion annually on unreported taxable income. Learning about some of these transactions through 1099s could help close that gap.
Tax compliance is a good thing, but the burden on businesses, especially small businesses, will be substantial. Just think about the effort required to collect tax identification numbers from every hotel, restaurant, online store or establishment at which you spend $600 per year. Every freelancer will now need to track every expense to every vendor. The coming administrative headache is leading some lawmakers and business groups to seek repeal of this provision of the new health care reform package. Even some of the reform legislation’s strongest supporters (think the White House) favor exempting firms of less than 25 employees and raising the reporting threshold from $600 to $5,000.
Yet the Senate voted down attempts to repeal or tweak the PPACA’s 1099 requirements. The problem is that repealing a revenue source for health care reform requires either finding a new source for these dollars or reducing the cost of the reforms. So while there’s bipartisan support for fixing this problem in the PPACA, agreement on how to pay for the fix is lacking. Democrats voted down an outright appeal of the provision because the revenue was offset by exempting more Americans from the PPACA’s requirement to obtain health insurance coverage. Republicans voted against the more limited change to the 1099 requirement supported by President Barack Obama and others because the lost revenue was to be made up by repealing tax breaks for large oil-and-gas producers.
Ultimately I believe Congress will find an acceptable way to pay for the fix. Given the state of the economy and the need to help small businesses, the political and ideological interests of both parties converge to find a solution. Of course, finding a fix in the run-up to November elections may be too much to expect. Fortunately, the 1099 changes don’t take effect until 2012 so there’s time to find a solution.
But if it’s this challenging to fix something relatively tangential to health care reform, one shudders considering what it will take to fix something closer to the core of the Patient Protection and Affordable Care Act.