April 7, 2011

AP Report on Obamacare 1099 Repeal Ignores How It Came About, Downplays Tax Increase, Misstates Current Law

1099-repeal-provisionThe repeal of Obamacare’s nightmarish 1099 requirement has passed both chambers of Congress and is on its way to the President for his expected signature.

In reporting Tuesday on the repeal bill’s progress, the Associated Press’s headline writers assured readers that the original requirement in Obamacare was a “small” component of it. The AP’s Stephen Ohlemacher also misstated current 1099 filing requirements, ignored the repeal bill’s de facto tax increases (i.e., reductions of tax credits) that were crammed into the bill to “pay” for lost revenue that will supposedly result from repeal, and glossed over the fact that the requirement made it into law because almost no one read the Obamacare legislation in the first place. Other than that, the AP report isn’t too bad. (/sarc)

Here are key paragraphs from Ohlemacher’s report (bolds and number tags are mine):

Congress votes to repeal small part of health law

Congress sent the White House its first rollback of last year’s health care law Tuesday, a bipartisan repeal of a burdensome tax reporting requirement that’s widely unpopular with businesses. Even President Barack Obama is eager to see it gone.

The Senate voted 87 to 12 to repeal the filing requirement, which would have forced millions of businesses to file tax forms for every vendor selling them more than $600 in goods each year, starting in 2012. The filing requirement is unrelated to health care. However, it would have been used to pay for part of the new health law.

The filing requirement was projected to raise nearly $25 billion over the next decade by ensuring that vendors pay their taxes. [1] Under the bill, the money will be made up by changing another part of the health care law, requiring more families to repay tax credits designed to help them cover insurance premiums, if their incomes increase beyond certain levels. [2]

Republicans said the filing provision is an example of what happens when lawmakers hastily patch together a massive bill like the health care overhaul, then vote to pass it without knowing everything that’s in it. [3] Lawmakers from both parties say the filing requirement could create a paperwork nightmare for businesses and the Internal Revenue Service.

Businesses already must file Form 1099s with the IRS when they purchase more than $600 in services from a vendor in a year. [4] The new provision would have extended the requirement to the purchase of goods, starting in 2012.

The requirement would hit about 38 million businesses, charities and tax-exempt organizations, many of them small businesses already swamped by government paperwork, according to a report by the National Taxpayer Advocate, an independent watchdog within the IRS.

… Starting in 2014, the new health care law will provide tax credits to low- and middle-income families to help pay health insurance premiums, if they don’t get insurance through their employers.

Under the law, if a family’s income increases, and the family members no longer qualify for the tax credits, or qualify for a smaller amount, they would have to repay a portion of those tax credits when they file their federal tax returns. [2] The bill passed Tuesday would increase the amount people would have to repay, generating a projected $25 billion over the next decade.

Notes:

[1] — As usual, Congress failed to estimate the out-of-pocket costs and hits to productivity businesses would have had to incur to comply. Those costs would have reduced the taxable incomes of millions of affected businesses of all types, reducing collections of personal income, corporate income, and Social Security/Medicare taxes. Those reduced collections would have partially if not completely wiped out the supposed $25 billion increase in tax revenues supposedly arising from increased compliance, and should have made the travesty in point [2] which follows unnecessary.

[2] — Don’t you love the passivity in the phrases “if their income increases,” and “if a family’s income increases” — like the money just falls out of the sky for no apparent reason? Here’s what this translates to in the real world: If a person works harder and as a result earns more money, or if another family member gets a job enabling the family to earn more money, Uncle Sam will take away a large and sometimes huge portion of the health care premium subsidy they were entitled to when they weren’t working so hard. As I read it, the subsidy takeaway will now be even steeper than what Robert Rector at the Heritage Foundation estimated in early 2010 when Obamacare legislation was advancing through Congress. Here is how it looked then, based on data Rector compiled in a detailed study of the legislation as passed by the House in the fall of 2009:

ObamaCareSubsidiesHeritage032610

As I explained in March 2010:

The orange boxes represent examples where the subsidy decrease amounts to almost 80% or more than 80% of a couple’s $5,000 increase in combined or joint income. After adding another 7.65% for Social Security and Medicare taxes on top of the typical 15% (or higher) marginal federal income tax rate, the extra $5,000 earned will cost the couple more than $5,000 — even before considering state and local income taxes.

Then there are the purple boxes, where subsidy loss alone amounts to more than $5,000, including one case where it’s more than double that, before considering any other taxes.

Given the disincentives, many and probably most lower- and middle-income Americans will conclude that there’s no point in accepting promotions, working overtime, getting a second job, or attempting any other form of financial self-improvement (except perhaps under the table).

As I interpret the AP’s report, the 1099 repeal bill’s “increase (in) the (subsidy/tax credit) amount people would have to repay” worsens the disincentives, something that hardly seemed possible. But never underestimate Congress, apparently even when the House is controlled by Republicans.

[3] — “Without knowing everything that’s in it” = “Without having read it.” Republicans all too typically seem to have missed an opportunity to remind their constituents of the fact that, as former House Speaker Nancy Pelosi brazenly bragged, we had to wait until Obamacare passed to find out what was in it.

[4] — Ohlemacher misstated current law concerning who is required to file 1099s. Issuing a 1099 is not always required when you have purchased “more than $600 in services from a vendor in a year.” As the 2010 instructions for Form 1099 in the second column on Page 1 state, it is generally not required for “payments to a corporation.” With relatively narrow exceptions, vendor 1099s are generally sent only to sole proprietors and partnerships. The Obamacare 1099 expansion would have been twofold, requiring issuance for services provided by corporations for the first time, while also extending the requirement to all purchases of goods.

A further thought regarding Item [2]: John Boehner & Co. must be feeling pretty good about repeal through the courts. If their confidence is misplaced, the tax increases built into the repeal bill will turn out to have been a more than minor betrayal.

Cross-posted at NewsBusters.org.

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2 Comments

  1. Was any of this indexed for inflation? Especially regarding note 2. Under Carter style inflation which we are about to get unless we are caught in this current prolonged Stagflation event no one will be enjoying any tax credits and taxes in general will increase on their own as a person’s income rises to match inflation.

    Hmmm, could it be that Obama planned to pay for ObamaCare and cut it’s expenses by causing inflation? Is the purpose of inflation to reduce massive debt? Could Obama’s response of let them buy fuel efficient cars to complaints of higher gas prices be the real reason for the current Libyan adventure? Nah, that’s just crazy conspiracy theory talk… Either this man is thee most dumbest person in the world due to his rigid ideological thinking OR he intended these results.

    Comment by dscott — April 8, 2011 @ 10:05 am

  2. #1 interesting possibilities that need a lot more vetting.

    Comment by TBlumer — April 8, 2011 @ 4:16 pm

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