Health Affairs

The Senate has voted to repeal one provision designed to help finance health reform, and the House is likely to follow. The target: a requirement that businesses file Form 1099 with the Internal Revenue Service (IRS) for all purchases made from any vendor totaling $600 or more per year.

This so-called 1099 provision doesn't have anything directly to do with health care per se, but was designed to capture tax revenues that may be lost if businesses fail to report income. However, lawmakers from both parties and the Obama administration now support repealing the measure on the ground that it would place an undue burden on business, especially small businesses.

The provision was designed to raise $19 billion in taxes that would otherwise go uncollected from 2010 through 2020. The Senate bill instructs the Obama administration to cut unspent federal funds to replace the money. The House version is expected to take a somewhat similar tack, although details have not yet been announced.

When Congress passed the Affordable Care Act in 2010, it set course to raise $420 billion in revenues and taxes over 10 years to help finance expansions in health insurance coverage. A minor portion was to come by having the government recoup taxes that were going unpaid by businesses. Section 9006 of the Affordable Care Act required all businesses, nonprofits, and governments--federal, state, and local--to file 1099 information returns with the IRS for all purchases made from any vendor totaling $600 or more during a calendar year. Businesses were already required under the law to report payments of $600 or more per year for services provided by vendors--for example, if they obtained services from an accounting or consulting firm. The new law extended that reporting to goods as well as services.

DETECT UNDERREPORTING OF INCOME: For instance, if a business or other organization bought $50 worth of sandwiches each month from a local delicatessen, information about those payments would have to be reported to the IRS by that business or other organization. The new requirement could be used to detect if the delicatessen was underreporting its income. The reporting requirement was to go into effect for all purchases made after December 31, 2011. As noted, over 10 years, the provision was estimated to raise $19 billion.

The business community almost universally panned the provision, arguing that it will be overly burdensome on small businesses, forcing them to file paperwork for even mundane purchases, such as $600 worth of coffee or office supplies purchased during a year from a single vendor.

Nina Olson, the IRS’s taxpayer advocate, cautioned in a June 2010 report that the provision could impose significant compliance burdens on millions of businesses and charities, and could also swamp the IRS with requests for taxpayer identification numbers and with 1099 forms. The overall burden “may turn out to be disproportionate as compared with any resulting improvement in tax compliance,” Olson wrote.

Numerous organizations, including the US Chamber of Commerce, the National Federation of Independent Business, and the Small Business Majority, supported eliminating the provision. Over the course of 2010, many Democrats also reversed their support for the provision and backed efforts for its repeal. Republicans have continually opposed the provision, along with many other provisions of the Affordable Care Act that they are seeking to repeal, defund, or block. President Barack Obama has endorsed eliminating the requirement several times, most recently during his 2011 State of the Union address, when his audience responded with a standing ovation.

REPLACING LOST REVENUE: Although repealing the 1099 provision gained bipartisan support, both parties and both houses of Congress have struggled to find a viable alternative for replacing the $19 billion that would be lost. In 2010, several bills to repeal the provision were introduced and voted on in the House and Senate. Some included ways of replacing the revenue, while others did not. None attracted enough votes to pass until February 2011.

Among the unsuccessful efforts in 2010 was an amendment introduced by Sen. Mike Johanns (R-NE). It would have paid for repealing the 1099 provision by removing money from the Affordable Care Act’s Prevention and Public Health Fund during the period 2010-17, and by making other changes to the act. Democratic leaders strongly objected, although seven Democrats supported the amendment. It failed to pass the Senate by 46-52 in September 2010.

Johanns later revised his amendment by not singling out the prevention fund and instead paying for the provision’s repeal by requiring the Office of Management and Budget to find other unspent federal funds. That effort, too, failed to pass in November 2010. At the same time, Senate Finance Committee Chairman Max Baucus (D-MT) offered an amendment to completely repeal the provision but without paying for it. Republicans, and some Democrats, were reluctant to support any legislation that would add to the federal deficit, and the measure attracted only 44 votes. In 2011, both Baucus and Johanns reintroduced their amendments to repeal the provision, as did Sen. Debbie Stabenow (D-MI). Her bill was similar to the Johanns provision, but it barred the government from cutting the budget for the Social Security Administration to offset the cost of repeal. Stabenow’s bill passed, 81-17 on February 2, 2011, with strong bipartisan support.

As of the date of publication of this brief, it appears likely that House Republicans will largely follow the Senate's approach. They are now expected to amend a repeal bill previously introduced by California Rep. Dan Lundgren that has already gathered 270 cosponsors (HR 4). Similar to the Senate bill, the new House bill would require offsetting federal budget savings.

The House Ways and Means Committee is expected to start work on the bill soon, and the measure could be voted on in the full House as early as mid-February. Differences between the House and Senate versions would have to be reconciled before final versions are passed. It is a near certainty that President Obama will sign a repeal bill into law. Because the 1099 provision was only one of many financing measures built into the Affordable Care Act, its repeal is not likely to have any direct impact on health reform's implementation. However, other revenue-raising provisions in the act have also come under attack, such as an excise tax on medical device sales. It remains to be seen whether efforts to defund aspects of health reform, or to repeal the entire Affordable Care Act, will reap results or will be blocked by congressional Democrats and the Obama administration.

Haberkorn, Jennifer, “Dems, GOP Maneuver on Repeal,” Politico, July 30, 2010.

Internal Revenue Service, National Taxpayer Advocate, “Report to Congress: Fiscal Year 2011 Objectives,” June 30, 2010.

Johanns, Mike, “1099 Amendment Gaining Bipartisan Support,” Press release, August 5, 2010.

Park, Edwin and Chuck Marr, “Johanns Amendment to Small Business Bill Would Raise Health Insurance Premiums, Increase the Ranks of the Uninsured, and Eliminate Preventive Health Funding,” Center on Budget and Policy Priorities, September 13, 2010.

Written by
Jennifer Haberkorn
(Haberkorn is a staff writer for Politico specializing in health care reform issues.)

Editorial review by
Mark A. Hall
Professor of Law and Public Health
Wake Forest University School of Law

Paul Fronstin
Director
Health Research and Education
Employee Benefit Research Institute

Ted Agres
Senior Editor for Special Content
Health Affairs

Susan Dentzer
Editor-in-Chief
Health Affairs

Health Policy Briefs are produced under a partnership of Health Affairs and the Robert Wood Johnson Foundation.

Cite as:
"Health Policy Brief: The 1099 Provision," Health Affairs, February 14, 2011.

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