Paying for Repeal of Revenue Raisers + A Peek Into Complexity of Section 36B

In 2010, Congress twice expanded 1099 reporting requirements. I think the primary reason for doing so is that the revenue estimates for both indicated they were revenue raisers and that allowed for a tax cut or spending increase. The health care legislation enacted in March 2010 expands, starting in 2012, 1099 reporting to require that they be issued to corporate payees and for goods purchased if the total exceeds $600 for the year. Then in September 2010, Congress added a requirement that landlords, even if not in a trade or business, start issuing 1099s starting for 2011. When both the issuers and recipients of these 1099s start thinking about what it means in terms of hassles and costs and then start thinking about whether it is going to result in more income being reported, it was quite clear that the cost-benefit wasn't there. After all, is the tax gap going to go down if a small business issues a 1099 to Office Depot or American Airlines? No.

But, these provisions went into the law as revenue raisers. I don't really think they were enacted as any serious effort to address the tax gap because they do not really get at the tax gap. And, because of earlier enactment of Section 6050W to require credit/debit card processors and Paypal to issue 1099-Ks to the merchants, to avoid duplicate reporting of items, if you pay using a credit card you don't report that on the regular 1099. What a mess. And, again, this isn't really the way to best address our $345 billion federal tax gap. (For more on that, see a short article of mine - (The Slow Pace of) Closing the Tax Gap.)

Well, the most recent effort to repeal these 1099 requirements is H.R. 4 that passed in the House on Monday with all Republicans voting for it along with 76 Democrats. The apparent objection of some who voted no is that the bill also reduced a particular health care subsidy for taxpayers. More specifically, it modifies IRC Section 36B to increase the amount of overpayment of the health care credit subject to recapture. Those opposing the bill said that was a tax hike requiring a 2/3 vote, but others said a reduction of subsidy is not a tax hike. Wow! A few observations:

1. The 1099 requirements went into the law as revenue raisers, it makes sense that if they go out, some other revenue raiser should take their place.
2. Pay back of a subsidy, a tax hike, a spending cut - does it really matter in terms of the overall effect on the federal budget? No, but ...
3. Isn't a reduction to a benefit provided by a tax rule (IRC Section 36B) a tax increase? If a credit amount were reduced, wouldn't that be a tax increase? Isn't that effect of the proposed Section 36B modification? But, see below on transparency...
4. I encourage you to take a look at Section 36B as added by health care legislation. It is long and complicated. You can find a copy here - go to page 237 (Act section 1401) and it goes on for about 20 pages!

A focus on transparency would be the best approach - just clearly state that when the 1099 requirements were enacted, a revenue increase amount was attached to them. If they are to be repealed, Congress sticks to the same revenue amount and states how it will make up that revenue and how that new provision works. If the 1099 provision was enacted with a simple majority, shouldn't that also work for its repeal (in theory)?

There is an interesting summary of the issue in The Hill's Floor Action Blog of 3/3/11 - here.

Will the new 1099 requirements be repealed? I think so, but it sure is taking a while to get past the revenue aspect of it - being honest about items 1 to 3 above should help move this along. Will there be a more concerted effort to address the tax gap in place of the mostly pointless 1099 provisions enacted in 2010? It doesn't seem so. What do you think?