Health Affairs

After nine months of wrangling, Congress has voted to repeal one provision designed to help finance health reform: 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 does not 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 supported repealing the measure on the ground that it would place an undue burden on businesses, especially small businesses.

The provision was designed to raise $19 billion in taxes that would otherwise go uncollected from 2010 through 2020. The repeal legislation generates a similar amount of funding by changing how the federal government recaptures tax credits given in advance to low- and middle-income Americans to purchase health insurance if their income changes during the year. President Barack Obama is expected to sign the bill into law soon.

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 continually opposed the provision, along with many other provisions of the Affordable Care Act that they are seeking to repeal, defund, or block. President Obama endorsed eliminating the requirement several times.

REPLACING LOST REVENUE: Although repealing the 1099 provision gained bipartisan support, both parties and both houses of Congress struggled to find a viable alternative for replacing the $19 billion that would be lost. Beginning in July 2010, nearly a dozen bills to repeal or modify 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 early 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.

On March 3, 2011, the House voted 314-112 to repeal the 1099 provision. That bill (HR 4), sponsored by Rep. Dan Lungren (R-CA), featured a different mechanism for offsetting the lost revenue. Specifically, the bill was designed to change the way that the government will recoup overpayments of tax credits to individuals to help them purchase health insurance as of 2014.

Under the Affordable Care Act, starting in 2014, people with incomes up to four times the federal poverty level will be eligible to receive advance tax credits or subsidies to help them purchase insurance through new state-run health insurance exchanges.

REPAYING THE SUBSIDY: However, should a person’s income increase during the year, such as through getting a raise, bonus, or a better-paying job, he or she would be required to repay part or all of the subsidy if total annual income equals or exceeds five times the poverty level. Under the new bill, people would have to repay more of the tax subsidy, and those who reach or exceed four times the poverty line threshold in one year must repay the entire subsidy. This change is estimated to generate nearly $25 billion, more than enough to pay for the repeal.

Many Democrats in the Senate objected to this approach, calling it a “tax on middle-class Americans” that would cause hardship on thousands of families. Senate Majority Leader Harry Reid (D-NV), however, supported the House version. After considerable maneuvering, on April 5, 2011, the Senate threw its support behind the House bill and voted an overwhelming 87-12 to pass it. The White House said it was “pleased Congress had acted to correct a flaw” in the health care law and indicated Obama would sign the bill.

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, 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. If the law were to be repealed, of course, there would be no tax credits flowing to individuals to help them purchase health coverage in 2014. Therefore, the new revenue offsets enacted to replace the 1099 provision would die along with every other feature of the Affordable Care Act.

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

Haberkorn, Jennifer, "Senate Finally Votes to Repeal 1099," Politico, April 5, 2011.

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, Updated April 7, 2011.

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