CBPP: Johanns’ 1099 Repeal Amendment Would Maintain Tax Loophole, Undermine Health Reform

Sen. Mike Johanns (R-NE)

Sen. Mike Johanns (R-NE)

Before health care reform became law, the government required businesses to fill out a 1099 tax form if they made payments of more than $600 to vendors for services they received. The government used these forms to monitor compliance with the tax code, because vendors are notorious underreporters of income. The IRS estimates that sole proprietors pay taxes on less than half of their income or underreport their income by some 57%. Consequently, “the GAO, the IRS, and the Treasury Departments of both President Bush and President Obama all recommended strengthening the reporting requirement to remedy this problem” and accordingly, Democrats included a provision in the health law that requires small businesses “to report payments of more than $600 to corporations and payments for goods and property (as well as for services).”

Conservatives and their small business allies (namely, the NFIB) have reacted with outrage, claiming that the expanded reporting requirement would add tremendous paperwork burdens. Democrats have largely agreed, but were slow to engage on the issue. Now, Sen. Mike Johanns (R-NE) and Bill Nelson (D-FL) have proposed competing amendments to alter the 1099 measure, but as Edwin Park and Chuck Marr point out in this new CBPP report, Johanns’ approach of completely eliminating the expanded reporting requirement leaves much to be desired:

Repeal would also cause the loss of $17.1 billion in revenue over ten years (the amount of revenue that otherwise would be collected, due to the improved tax compliance that would result from the provision of the Affordable Care Act). To make up for this loss, the Johanns amendment would strip $11 billion in Affordable Care Act funding for critical investments in health prevention and related activities and would seriously weaken other aspects of the health reform law. […]

The Johanns amendment would eliminate all funding for the Prevention and Public Health Fund for fiscal years 2010-2017, taking away investments that could help reduce the incidence of chronic illness and infectious disease, improve overall health, and contain costs. […]

The mandate has an exemption for people who would have to pay excessive amounts to purchase insurance — it allows people who would have to pay more than 8 percent of their income on premiums to remain uninsured without incurring a penalty. The Johanns amendment would lower the threshold to 5 percent of income. This change would exempt large numbers of additional people from any penalty if they remained uninsured, and would lead to substantially fewer healthy people enrolling in coverage until they became sick, thereby driving up premiums and increasing the number of uninsured people.

In other words, the GOP is seizing on what most wonks agree — including many Democrats — is a tangible concern about the 1099 to weaken the health care law. Tellingly, Johanns’ amendment does not address the problem of underreporting income; it strips the 1099 provision and allows vendors to underpay their taxes, and shift that burden to all of us.

It’s unclear how the 1099 language was included in the health care law in the first place. Some sources have suggested that Democratic staffers were bullied into accepting the amendment by Peter Orszag and had initially resisted such broad language; others believe that the provision provided a much needed spending offset to the law’s coverage provisions. Either way, the issue has provided Republicans and Democrats with a rare moment of agreement — only the GOP seem more interested in neutering reform and preserving a tax loophole. For details on Nelson’s solution and more on the 1099 controversy, be sure to read the CBPP’s full report HERE.

The American Public Health Association has also started a petition protesting Johann’s cuts to prevention.