Wall Street Journal: A 1099 Repudiation

f t # e
Washington, D.C., February 5, 2011 | comments
Wall Street Journal Opinions

Democrats now claim that the infamous 1099 business reporting mandate that the Senate repealed this week was an accident, as if they were as surprised as everyone else to learn that this destructive provision had crept by itself into law. The truth is that the 1099 rule emerged from the same core ideology as ObamaCare, and its overwhelming repudiation by Democrats may be an important inflection point in the health-care debate.

The 1099 rule is the first of the ballast to go over the side, and Democrats hope that such "improvements" will be enough to ride out the public storm. Then again, they also claimed that voters would learn to love ObamaCare once it had been stuffed through Congress, among many other misjudgments. The political history is revealing and instructive.

Less than a year ago, liberals couldn't see how anyone could possibly object to a rule requiring businesses to file 1099 tax forms with the Internal Revenue Service every time they spent more than $600 with a single vendor. Yes, this would result in a vast new paperwork and accounting burden for 30 million businesses and hit start-ups hardest, not to mention farms, charities and churches. But Democrats saw IRS surveillance of nearly all business-to-business transactions as merely an exercise in good government.

The point was to close the "tax gap," the largely mythological difference between the estimated taxes due under the business tax code and what the IRS actually collects. During the Bush years, Democrats and more than a few Republicans convinced themselves that businesses were cheating the government out of revenues through deliberate under-reporting and various tax shelters.

This notion prevailed at the Senate Finance Committee under both Democratic Chairman Max Baucus and Republican Chairman Chuck Grassley. Budget Chairman Kent Conrad was another evangelist. In its first budget, the Obama White House promised "robust" tax compliance enforcement "to narrow the annual tax gap of over $300 billion," in contrast to the lethargy of its predecessor.

The 1099 ObamaCare footnote thus received no scrutiny at first because it was so mundane. Everyone in Washington agreed that corporations were stealing billions of dollars every year that rightfully belonged to Congress to spend. (The issue only blew up when the IRS's National Taxpayer Advocate Nina Olson, followed by the GOP and the business lobby, made it a priority last summer.)

In the same Washington mindset, the 1099 mandate doesn't impose any more of a reporting burden than a European-style value-added tax. And it doesn't create any more of a drag on economic growth than the higher income tax rates that liberals believe don't matter either. As recently as September, Treasury Secretary Tim Geithner and Health and Human Services Secretary Kathleen Sebelius were still defending the 1099 rule as a good-faith "bipartisan provision to close the tax gap."

At that point, the White House was attempting to head off out-and-out 1099 repeal, and the duo did endorse arbitrary carve-outs for the smallest businesses—but these only made the provision more complex and onerous. House and Senate leaders tried similar gambits, while tying such half-measures to other business tax increases to scare off Republicans and give Democrats a way to tell voters they'd supported repeal.

The day after the election, President Obama deflected questions about the role health care played in the rout by offering the 1099 sacrificial lamb. He called it "counterproductive" and something "I think we can tweak and make improvements on the progress that we've made." He also mentioned it in the State of the Union, and total repeal sailed through the Senate on Wednesday, 81 to 17.

The mystery is the 17 Democrats who continue to think this is a good idea—even authors Messrs. Baucus and Conrad voted to heave it over the side. One of the 17 is Tom Carper of Delaware, which is home to thousands of small businesses. Does he think Christine O'Donnell is going to be his 2012 opponent? And what about New York's Kirsten Gillibrand?

The larger political question is whether voters will be satisfied by this or that "improvement" to ObamaCare. The White House is trying to outflank public opposition with a controlled burn, but wildfires often move in surprising and unmanageable directions.

f t # e
Tags: Health