Over the last several months, I’ve reported that governors, states, and even corporations that are challenging the new health care law are eagerly applying for and accepting the law’s federal grants. Many states are busily implementing the measure despite the resistance of their elected leaders, creating a kind of schizophrenic environment in which the politicians speak out against reform but state health departments are busily working with Washington D.C. to ensure that the law meets state needs and requirements.

Now, Amanda Terkel is reporting that even Gov. Tim Pawlenty (R-MN) — who has recently issued an executive order to stop implementation — is quietly allowing more than $10 million to flow into the state:

The Huffington Post has learned that the state Department of Health is considering 10 federal grants worth more than $10 million in total and the governor’s office is allowing all but two of those grants to go forward, highlighting the fact that Pawlenty is more than willing to take advantage of federal money when it fits his agenda. [...]

In other words, Pawlenty’s executive order isn’t really keeping the Affordable Care Act out of Minnesota; millions of dollars from the federal law can still flow into the state. The Huffington Post spoke with John Stieger, spokesman for the Minnesota Department of Health, who identified 10 existing grants worth more than $10 million that come from the federal health care law. He said that Pawlenty’s office had authorized all but two of them to go forward: the Personal Responsibility Education Program grant that provides funding for comprehensive sex education and the Health Insurance Exchange.

Indeed, this sounds like a consistant pattern across many so-called anti-reform states. When I spoke to one health care advocate in Utah — another state that is suing the federal government while meeting with HHS to ensure that the law meets its needs — she speculated that even the repeal and replace advocates realize that “this is how they have to do reform and it is important to get started and try out some of these ideas.” “I wonder if they’re not thinking well, the only way to prove reforms are wrong, is to give them a good college try,” she said. In Pawlenty’s case however, it’s probably an acknowledgment of the limitations of his public rhetoric. Despite his principled and “presidential” stances, this is a concession that the state will benefit from reforms.

Earlier this morning, the Senate voted down Sen. Mike Johanns (R-NE) so-called 1099 amendment which would have repealed a tax reporting requirement for small businesses, but made up for the revenue shortfall by eliminating $11 million from the Preventive Health Task Force and weakening the individual health insurance mandate. Sen. Bill Nelson’s (D-FL) alternative proposal to require only larger businesses to report their transactions with vendors also failed to garner the necessary 60 votes.

It’s unfortunate — but all too predictable — that both parties couldn’t find agreement despite growing consensus surrounding the key issues in the 1099 debate. For instance, both the Bush and Obama Treasury Departments agreed that sole proprietors of businesses drastically underreport their taxable incomes and as a result underpay taxes. Both administrations recommended strengthening the reporting requirement to remedy this problem and now members from both parties believe that the health care law went too far and burdened small businesses with unnecessary paperwork.

Bu that’s where the consensus ends. The Johanns amendment completely eliminated the reporting requirement and paid for the change by weakening the individual health insurance mandate and taking $11 million from the Preventive Health Fund. When I asked Johanns office why the Senator was taking money out of prevention, they sent me a note saying that the he believed that the fund could be used as a slush fund. Here is how Johanns described it today on Washington Journal: “in all fairness, money from that Fund has already been diverted by the Obama Administration into other areas, and I believe it will be a slush fund for that,” he said. Needless to say, administration sources disputed that characterization.

After the Johanns amendment failed, Republicans rejected Nelson’s proposal because it required additional tax reporting — the kind of reporting supported by the Bush administration’s own Treasury Department. “Is that too much to ask in order that we get people to pay their income tax that they are owed that are not getting out of it to the tune of $17 billion?” Nelson asked on the floor. “In tightening up the law, we’re going to get people to pay their income tax, but we’re going to do it in a way that is not harassing any business but particularly small business because we’re going to exempt them if they are 25 employees or less.”

Ultimately, Senators will propose more fixes and the final amendment will hopefully improve tax compliance while minimizing the burden to small businesses. The sticking points are the offsets and as soon as the GOP abandons their politically motivated provisions, the 1099 requirements will likely be modified.

This morning, a federal court in Pensacola, Florida will consider the government’s motion to dismiss the 20-state challenge to the national health care reform law. Last night, Florida Attorney General appeared on Fox News’ Greta Van Susteren to talk up his suit and predicted that the states will have standing to challenge the law — a legal term meaning that they have actually been injured in some way by the law being challenged. You can watch McCollum’s appearance here and read Florida’s arguments here, but most experts have serious questions about the state’s standing and the broader challenge. Their arguments boil down to this:

1) No standing: States don’t have the standing to challenge the individual mandate because they will never have to pay a penalty or take out insurance. The two individual plaintiffs that have been added to the Florida case are also irrelevant because they demonstrate no current injury. The provision does not take effect for another four years and any har is merely speculative. What’s more, the plaintiff’s insurance status could change between now and 2014 — ensuring that they don’t have to pay a penalty for not purchasing coverage.

2) Can’t get around the Anti-Injunction Act: The Anti-Injunction Act, forbids courts from “restraining the assessment or collection of any [federal] tax.” Since the plaintiffs themselves allege that the penalty under the mandate is an “unconstitutional tax,” they recognize that they fall within the scope of the Act.

3) Insurance = commerce: Congress can regulate commerce: Congress has determined that the individual mandate is an essential part of this larger regulation of economic activity, and that its absence would undercut Federal regulation of the health insurance market. Even the failure to buy a product constitutes commerce because individuals who do not carry insurance are participants in the health care market and end up receiving treatments from traditional providers for which they either do not pay or pay very little. Congress found that the cost of providing uncompensated care for the uninsured was $43 billion in 2008.

4) Falls under ‘Necessary and Proper’ clause: The Constitution gives Congress the power “[t]o make all laws which shall be necessary and proper for carrying into execution” its power to regulate interstate commerce. As Justice Scalia explains, this means that “where Congress has the authority to enact a regulation of interstate commerce, it possesses every power needed to make that regulation effective.” The minimum coverage provision is constitutional under this Scalia test, even if it were not valid as part of Congress’s power to regulate commerce. This is because the minimum coverage provision is essential to ensuring that the entire ACA works effectively.

5) Congress has the authority to collect taxes: Congress also has the authority to “lay and collect taxes” under the Constitution, and this power to tax includes upholding the individual. “The provision works by raising an additional income tax off of most individuals who do not carry health insurance—taxpayers who refuse insurance must pay more in taxes, while those who do carry insurance are exempt from this new tax.”

Of course, McCollum has filed his lawsuit in one of the more conservative courts in the state and so it’s difficult to know how the court will rule. If the case does move forward, McCollum’s likely successor, Republican Attorney General Pam Bondi has promised to continue with the challenge. Democratic challenger Dan Gelber disputed the wisdom of that position.

“There are four million people without health care in our state… everybody agrees this was not the most perfect bill that’s ever passed. But I am not going to take the resources of this office that are so desperately needed to solve some of the pressing security issues of our state and dedicate them to what I think ultimately really was a politically motivated lawsuit that was spawned out of a primary battle and that, ultimately, I don’t think has a whole lot of merit when it gets to the Supreme Court, which I think it will,” he told Van Susteren. “But I do think if you don’t like the bill, Miss Bondi should run for the Congress, where she can, as a legislator, fix it in the next legislative session,” he said. “You shouldn’t go after it in what I think is going to be ultimately a very frivolous lawsuit.”

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Today, the Senate is expected to take up a measure that would repeal a part of the health care 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). Now most folks I’ve spoken to agree that while 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% — this current provision is just too burdensome. Just ask the White House: “We are committed to reducing the gap between taxes legally owed and taxes paid,” Treasury Secretary Tim Geithner and Health and Human Services Secretary Kathleen Sebelius wrote to Majority Leader Harry Reid and Minority Leader Mitch McConnell today. “However, the administration believes that the burden created on businesses by the new information reporting requirement on purchases of goods that exceed $600, as included in Section 6041 of the Internal Revenue Code as modified by Section 9006 of the Affordable Care Act, is too great.”

And to that end Sen. Bill Nelson (D-FL) has proposed a compromise that would “exempt businesses with fewer than 25 employees” from the requirement and “significantly increase (from $600 to $5,000) the threshold for payments that must be reported.” “The amendment would also give the Treasury the regulatory flexibility to further limit the requirement both before and after its 2012 implementation.”

In other words, Nelson’s solution addresses the paperwork concern while simultaneously trying to close the tax hole. The original measure raised $17.1 billion over ten years and to offset some of that cost, Nelson would reduce companies for oil companies. Sen. Mike Johanns (R-NE), meanwhile, has proposed an alternative would completely repeal the reporting requirement and make up the revenue shortfall by defunding public health and exempting more people from the individual health insurance mandate. Harold Pollack explains:

Should we promote public health by providing extra funds for HIV prevention, cancer screening, flu vaccination, and the like?

Or should we zero out these funds in order to repeal a small health reform provision that clamps down on rampant tax evasion? That’s the choice Congress is likely to face next week. Some prominent Republicans want it to choose the latter, although you likely won’t hear about it—at least, not in those terms….To repeat: Tighter tax requirements on small business prevent some firms from committing tax evasion, and it imposes some costs and bother on law-abiding firms which now have to fill out some more paperwork and presumably update their Quicken software. Senator Johanns believes that it’s so vitally important to loosen these requirements that he would make up the lost revenue by slashing federal funding for critical public health efforts—efforts that are already taking some tough hits because of the state and local budget crisis.

Invention in preventive services is something both Republicans and Democrats have rallied behind — it’s something the GOP tried to take credit fro on the floor of the Senate. What’s going on here is an effort to establish a precedent for repealing portions of the health care law, not to address the paperwork complaint. They’re seizing on an unpopular provision to weaken the health care law and sell that accomplishment in the midterm — both to their base and business supporters. 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.