House and Senate ping-pong hated small biz tax rule

By Jennifer Liberto

WASHINGTON (CNNMoney.com) -- The House and Senate are at a stalemate when it comes to getting rid of a hated small business tax reporting provision.

While lawmakers in both parties of the House and the Senate want to repeal the so-called 1099 reporting rule, calling it an onerous provision that will break the back of small business, nobody is able to come up with an actionable plan to pay for the measure.

The House voted Thursday to repeal a part of the health care reform law hated by small businesses -- but it is doubtful the proposal will get past the Senate.

By a 314-112 vote, the House acted to repeal the new rule, which requires any taxpayer with business income to issue 1099 forms to all vendors from whom they've purchased more than $600 of goods and services in a tax year.

That's a massive expansion in the role of the 1099 tax form, which currently reports non-wage income for individual workers.

The IRS's National Taxpayer Advocate estimates that this change will affect 40 million taxpayers, creating a compliance burden that could be "disproportionate as compared with any resulting improvement in tax compliance."

Congress passed the rule requiring small businesses to report those goods and services purchased as a part of the broader health care reform law passed last year. Repealing the reporting rule would cost the federal government $22 billion over the next 10 years, because it would result in small businesses paying less in taxes.

Repealing the rule is one of the few things that Republicans who control the House and Democrats who control the Senate agree they want to do this year, because of the paperwork nightmare it creates for companies.

But it's unlikely that the Senate, which passed its own repeal last month, would go along with the House version to pay for the bill.

In its effort to repeal the reporting rule, the Senate would pay for the repeal by directing the White House to find and use money that's been slated for other government programs but not yet spent.

By contrast, House Republicans want to offset the cost by rewriting a section of the health care law that gives Americans subsidies to buy health insurance.

Republicans want to crack down on the overpayment of those subsidies and recover money from families whose income ended up disqualifying them for the health care subsidies. Republicans would allow the government to recover more of these overpaid subsidies -- even when families accidentally made too much money, such as through an unexpected bonus check.

House Democrats spent most of the debate accusing Republicans of paying for the bill by raising taxes on the middle class. Last year, House Democrats proposed paying for the bill by "closing tax loopholes" for companies that defer taxes through offshore subsidiaries.

"Hidden deep in this bill is language that will, indeed, increase taxes on the middle class by thousands of dollars a year," said New York Democrat Rep. Joseph Crowley.

But Republicans say their pay-for method isn't a tax hike. "It's returning an improper government subsidy, which is not a tax increase," said California Republican Rep. David Dreier.

They also say that Democrats themselves had once considered employing the same tactic in the health care reforms that passed last year.

President Obama's budget office warned Tuesday that the White House also doesn't like the way Republicans pay for the bill. But the administration stopped short of threatening a presidential veto.