ObamaCare Meltdown, Part I: Paperwork Avalanche

When it comes to their vision of health-care reform, the Democrats feel there is no price too high for the American people to pay.  Last night, the Senate failed to pass an amendment that would have eliminated the job-killing 1099 reporting requirements from the ObamaCare bill.  This is one of the many tendrils reaching from ObamaCare into every aspect of our lives, a requirement that businesses file a 1099 form every time they purchase goods and services over $600 from a given vendor in a single calendar year.  The cost of compliance with this requirement will be staggering.

1099 forms are not easy to prepare.  Receipts for all purchases must be attached, and copies must be sent to the vendor, as well as federal and state tax authorities.  It’s not difficult to rack up $600 in purchases from a vendor in a single year, so businesses will need to add up thousands of receipts when tax time rolls around, merely to determine which vendors need 1099 forms.  Receipts for even the most minor purchases will have to be carefully filed away and totaled at year end.  Imagine small business owners and their accountants crawling through a mountain of receipts at the end of the year, reading faded ink from eleven-month-old receipts for delivery services and minor office repairs… discarding a pile that totals only $550, but setting aside a pile that added up to $601 so the required paperwork can be completed.

In an April 2010 blog post, Chris Edwards, director of tax policy studies at the Cato Institute, put it this way: “When a business buys a $1,000 used car, it will have to gather information on the seller and mail 1099s to the seller and the IRS. When a small shop owner pays her rent, she will have to send a 1099 to the landlord and IRS. Recipients of the vast flood of these forms will have to match them with existing accounting records. There will be huge numbers of errors and mismatches, which will probably generate many costly battles with the IRS.”

The Wall Street Journal offered this little thought experiment in September: “Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations’ corporate parents.”

If you’ve never done accounting work for a small business, you may not fully appreciate the magnitude of the burden this one, “minor” provision of the 2,000 page ObamaCare bill is dropping on them.  The number of 1099 forms filed with the IRS will increase into the billions.  I was working as a computer consultant for the contracting industry when this provision of “health care reform” was discovered, and mentioned it to my audience while conducting a seminar.  They recoiled in stunned disbelief.  I’ve never heard so many curse words muttered simultaneously.  The most common non-obscene word floating through the shadows of the conference room was “insane.”  A few of them refused to accept it until I showed them proof on the Internet.

Small businesses will be hit especially hard, since large corporations already have sizable accounting teams.  Their response to the new filing requirements will provide a classic case study in the way avoidance behavior destroys the elaborate schemes of statists.  The most logical response to a requirement that wraps purchases above $600 in a thick layer of expensive paperwork is to reduce the number of vendors your company does business with.  The second logical response is to reduce the number of small purchases a company makes.  These two avoidance behaviors will devastate small suppliers, handymen, and even concessionaires who provide coffee and snacks to offices.  Small businesses will also be forced to devote human resources to complying with these new paperwork requirements, instead of hiring sales or production staff.  The number of hours available for productive work that stimulates the economy will decline.  Some “mom and pop” operations will conclude their business model cannot survive the combination of accounting burdens and avoidance behavior from their small-business clients.

What was the point of slipping this paperwork landslide into a “health care reform bill?”  It’s supposed to increase tax receipts to IRS, which estimates $340 billion in taxes go unpaid because of the loose reporting requirements we currently enjoy for small purchases.  The Democrats who inflicted ObamaCare on us had to pretend it wouldn’t blast our federal deficit into the stratosphere, and this is one way they conjured some imaginary money to use for sauce when they cooked the books. 

There were actually two amendments for repeal of the 1099 requirement floating through the Senate last night.  The Democrat amendment was offered by Max Baucus of Montana, who said his legislation differed from the Republican alternative in how they would “pay for the change.”  In other words, the Democrats are already haranguing us about how we’re going to “pay” for fixing their ObamaCare disaster.  All of the money absorbed by this massive boondoggle magically became their property in the moment they passed it.  I sure hope fixing it doesn’t cost over six hundred bucks, or we’ll have to file a ton of paperwork.