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November 15 2010

Shred the 1099 Provision!

Hadley Heath

Democratic Senator Max Baucus has seen the light.  It looks like he's ready to undo one of the most ridiculous provisions of the health care reform: the 1099 provision. 

As I've explained here and more in-depth here, Obama's health overhaul is bad for business.  It creates costly new mandates (leading more and more businesses to file for waivers), raises costs to employers (which they will pass on to workers), and generates new tax and administrative burdens. 

A brief explanation of the 1099 provision: If you are in business you already know about 1099 forms.  You must file one of these to the IRS for any person from whom you purchase $600-worth of service in one year.  Let's say you have someone come clean your office space occasionally, and you pay this person more than $600 this year.  You're supposed to file a 1099, so that the government knows that this person has received this income (and he/she must pay taxes on it).

But starting in 2012, thanks to the health reform law, businesses must file a 1099 form for every entity (even if that entity is another corporation) for the purchase of services or merchandise that exceed $600 annually.  Now this is just silly.  I understand that the goal for the government is to get their hands on more unreported income, but this new provision is on transactions that should already be reported and taxed.  If there are businesses evading the law and not paying taxes on transactions of this kind, is a new law calling for more paperwork really going to make them more likely to comply with tax law?

No!  And worse yet, it's the vast majority of law-abiding, tax-complying businesses that will suffer.  The average number of these forms that businesses file is expected to multiply eight or nine times.  Estimates show that each form takes a half hour to fill out.  This costly time and labor burden will hurt all businesses, but especially small businesses that lack the administrative capacity to handle this paperwork increase.

From Reuters:

Baucus noted that the change was originally proposed under former Republican President George W. Bush.

Baucus said he was convinced by business groups' complaints that it was an administrative burden.


Obama last week said that he would fight any attempt to repeal the legislation, but would be willing to consider some Republican ideas. He suggested the two sides work together to change the new business transaction reporting requirement.

It doesn't matter if the 1099 provision is or was a Republican idea or a Democrat idea.  The only thing that matters now is that it is a bad idea.  I look forward to seeing it repealed.

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