Senate Dem leaders want to soften tax provision in health law

Senate Democrats want to scale-back a controversial part of their own healthcare law that imposes new burdens on small businesses.

The proposal — introduced Thursday by Sen. Bill Nelson (D-Fla.) with the support of party leaders — would eliminate a new tax filing requirement that many conservatives, backed by the business community, deem a job killer.

The bill arrives amid growing support for a rival GOP plan that would eliminate the filing requirement more broadly. Sponsored by Sen. Mike Johanns (Neb.), the legislation would offset the repeal with billions of dollars in cuts to preventive healthcare services.

The Democrats' bill, by contrast, would relax a portion of the  small business provision, and pay for it by killing a tax break for the nation's oil giants, including BP.

The action comes as Republicans hit President Obama and Democrats hard over the economy. Businesses are not hiring enough to lower the nation's 9.5 percent unemployment rate, and the GOP is intensifying its arguments that Democratic tax and regulatory policies are to blame. 

Senate Minority Leader Mitch McConnell (R-Ky.) slammed the tax provision this week, saying it would create "an enormous amount of paperwork and complexity" for the nation's businesses.

"It's no wonder businesses are not expanding," McConnell told Fox News Wednesday. "The president's job killing agenda has been a big factor there."

A procedural vote on the Johanns' bill is scheduled for Tuesday, Sept. 14, when the Senate returns from its August vacation. Afterward, lawmakers will take up the Nelson alternative amendment.

At issue is a provision of the Democrats’ new healthcare reform bill requiring businesses to file 1099 forms with the Internal Revenue Service (IRS) when goods purchased from another business, even corporations, exceed $600 in a year. Under previous law, the reporting requirement pertained only to services from non-incorporated businesses in excess of $600. 

The provision doesn't create a new tax, but is simply designed to ensure that businesses comply with existing tax laws. Congressional Budget Office estimates the provision will generate roughly $17 billion over 10 years.

The new filing mandate goes into effect at the start of 2012.

Conservatives on Capitol Hill have joined the business community in battling the provision, saying it will cripple small businesses with red tape when the resources would be better spent hiring new workers.

And Republicans aren't the only critics. On Thursday, Sen. Blanche Lincoln (Ark.) became the first Democrat to endorse the Johanns's repeal bill.

"No piece of legislation is ever perfect, and it's important we take steps to make improvements where we can," Lincoln said of the health reform bill. "While I believe that improved bookkeeping and reporting standards to the IRS have merit, I also want to ensure policy changes do not create unnecessary burdens for the small businesses that serve as the backbone of Arkansas’s economy."

House Democrats have also supported a repeal of the 1099 mandate, voting last week on legislation to do just that. The bill failed to pass under a suspension of the rules — 241-154 — with 153 Republicans voting against the bill. The Republicans opposed the Democrats' offsets, which included efforts to close tax loopholes on multinational companies.

Ways and Means ranking member Dave Camp (R-Mich.) offered a GOP bill that would've repealed the 1099 requirement provision and paid for it by reining in subsidy overpayments related to the new healthcare law. 

The tax filing provision has also captured the attention of the National Taxpayer Advocate (NTA), an independent watchdog operating within the IRS, which recently warned that "the new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance.”

The Democratic alternative would repeal the 1099 filing requirement on purchased goods for all businesses with fewer than 25 employees. For larger businesses, it would hike the threshold for reporting purchased goods, from $600 to $5,000. The Nelson bill would also exempt all purchases made with a credit card. 

The Florida Democrat has proposed to pay for his amendment by repealing language in the tax code that allows oil and gas companies to make tax deductions.

"Specifically, it would repeal Section 1099 of the tax code, which currently allows these corporations to deduct 6 percent of their income from oil and gas production from their tax liability, effective December 31, 2010," the office of Senate Finance Committee Chairman Max Baucus (D-Mont.) explained Thursday. 

The provision would affect only the five largest oil companies — those with pre-tax revenues exceeding $1 billion, Baucus's office said.

Baucus's office called the proposal "an important first step to demonstrate that Senate Democrats understand the concerns of small businesses and intend to address those concerns." 

"If these changes are not enough, further changes to this reporting policy will be made."

This story was posted at 8:57 a.m. and updated at 11:33 a.m. and 2:31 p.m.