Over the last several weeks, the administration has said much about the need to create jobs and help small businesses. To quote the President, “Small businesses are the backbone of our economy…They are going to lead this recovery.”  Members from both sides of the aisle agree with the President that small business development is essential to restoring our economy. Unfortunately, we continue to see a disconnect in Washington between sound bites and reality.

                                   Burdening Small Businesses

This past week, the Senate had an opportunity to stand by small businesses by repealing a provision of the massive health care legislation that threatens to burden businesses with overwhelming amounts of unnecessary paperwork.  Rather than support America’s job creators, a majority of Senators chose to defend a harmful provision in the President’s health care bill. 

As a way to fund the expensive health care plan, Democrats included a provision requiring every company, nonprofit, church, and local and state government entity to submit an IRS 1099 form when goods purchased from another business exceed $600 in a year.  The new mandate in the health care bill would bury businesses in paperwork, forcing them to file forms for routine expenses like phone, internet, office products, and shipping costs. This onerous, backdoor tax provision is estimated to increase reporting requirements by as much as 2,000 percent.

                            Mandates Discourage Job Growth

Recently, I conducted a five-week long listening tour in Mississippi. I heard from many small business owners who want to expand and hire employees, but they continue to be discouraged by upcoming tax hikes and new government regulations.  According to the National Taxpayer Advocate (NTA), a division of the IRS, the 1099 mandate will affect 40 million businesses.  Staff time and resources dedicated to track expenses, file additional paperwork, and comply with this mandate will increase the costs of running a business.  Every dollar a business spends trying to comply with federal regulations is a dollar that is not available to be used to hire a new employee or expand inventory.

Stacy McCall, president of a janitorial company that offers cleaning services to Mississippi businesses, shared with me her concerns regarding the new mandate.  Ms. McCall’s company submitted about 15 of these IRS forms last year.  Under the new regulation, she estimates that her staff will need to process more than 95 forms – a 533 percent increase in paperwork.

A drastic increase in overhead costs for businesses is not the only consequence of this new policy.  The IRS mandate also creates a perverse incentive for companies to consolidate suppliers and avoid working with smaller businesses.  If a company has to fill out a separate IRS 1099 tax form for every single business where transactions exceed $600 in a given year, then that company is likely to consolidate suppliers. As a result, smaller, mom-and-pop shops may lose business to larger companies.

                           Standing Up for Small Businesses

It is surprising that Senate Democrats chose to defeat a bipartisan effort to repeal this devastating tax mandate.  Republican Senator Mike Johanns from Nebraska and Democrat Senator Blanche Lincoln from Arkansas offered an amendment this week to strip the provision from the health care bill. Even the House Democratic Leadership recognized the consequences of the hidden tax and supported a full repeal. Unfortunately, Senate Democrats chose to defend the President’s health care bill rather than support small businesses.  We should cast partisan politics aside when it comes to supporting small businesses. Washington can no longer encourage business owners to hire workers and help boost the economy while at the same time hitting them with new, burdensome mandates.

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