The House Ways and Means Committee approved two separate pieces of legislation on Thursday to repeal the onerous 1099 reporting provisions enacted in 2010, with Republicans and Democrats sharply divided over how the bill would be paid. 

The committee began markup work on the two bills earlier in the day (see House Panel Works on Repealing 1099 Requirements). H.R. 4,  the “Small Business Paperwork Mandate Elimination Act of 2011,” repeals the new Form 1099 information reporting requirements that were imposed on small businesses to help pay for the health care law.

H.R. 705, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011,” introuduced by Rep. Dan Lungren, R-Calif., repeals the new Form 1099 information reporting requirements that were imposed last year in the Small Business Jobs Act on owners of rental real estate; and reduces improper overpayments of exchange subsidies established under the health care law.

The committee voted 21-15 to send the bill to the full House for consideration. However, Democrats on the committee registered their disapproval of the way the repeal would be funded, claiming it would lead to increased taxes on low-income and middle-class Americans who had received tax credits for health insurance under the health care reform bill.

More than 175 organizations support 1099 repeal, including the American Institute of CPAs, and many in the small business community signed a letter calling for Congress to repeal the 1099 reporting provisions.

At the conclusion of the markup and approval of both bills, House Ways and Means Committee Chairman Dave Camp, R-Mich., hailed passage of the bills.

“The legislation approved by the committee today is a victory for America’s small businesses, families and individuals,” he said. “Congress should make every effort to reduce the heavy burden of paperwork that takes time, energy and resources away from creating jobs. Families and individuals who do something as common as rent out a room and either replace an appliance at their rental property or pay a lawn service should not have to worry about the added headache of reporting that transaction to the IRS.”

The Senate approved a repeal amendment earlier this month as part of a larger bill modernizing and reauthorizing the Federal Aviation Administration (Senate Passes 1099 Repeal Amendment). The Senate passed the FAA bill on Thursday night. It includes provisions repealing the 1099 requirements in the health care reform law, but not the provisions in the Small Business Jobs Act applying to rental property. The cost of the Senate version of the repeal is offset with unspecified cuts in discretionary spending, as opposed to more specific offsets in the House legislation.

Democrats on the House Ways and Means Committee registered their disapproval with the way the repeal would be offset in their bill. They claimed it would raise taxes on low-income and middle-class families by forcing them to pay the IRS billions of dollars in increased taxes.

The Affordable Care Act makes advanced tax credits available for people with incomes below 400 percent of poverty to assist with the cost of obtaining affordable health insurance. During tax-filing season, there is a reconciliation process comparing actual income versus income upon which the tax credits were advanced. This process of reconciling actual income vs. tax credits received is often called “true up.”

The Affordable Care Act protected people receiving subsidies from having to pay the IRS the entire difference in their tax credit level if they saw a change in income. Under the law, the payment amount for individuals with incomes below 400 percent of poverty was capped at $250 for an individual and $400 for a family. However, people whose income changed even slightly above 400 percent of poverty would suddenly owe the IRS 100 percent of any tax credits they received.

In December, Congress changed the policy to a graduated income approach that protects those with lower incomes, while evening out the cliff that faced people at the 400 percent threshold.

The structure of the repayment caps is one of the few health reform issues agreed to on a bipartisan basis, according to committee Democrats. Every member of the Ways and Means Committee who was in Congress last year voted for this policy when it passed by a vote of 409-2 in December, Democrats on the committee pointed out. Committee Democrats noted that they voted last July to repeal the 1099 requirements in a revenue-neutral way, and all the Republicans voted no at the time because of the offsets that Democrats wanted to use to pay for the repeal.

To offset the cost of the 1099 repeal on Thursday, Republicans proposed reinstating the cliff at the 400 percent threshold and collapsing the repayment caps more broadly below the 400 percent threshold. 

Democrats complained that Republicans had rejected an amendment offered by Rep. Joe Crowley, D-N.Y., which would repeal the “true up” provision proposed in the Republican bill. “This is a tax increase plain and simple,” said ranking member Sander M. Levin, D-Mich., in a statement.  “Republicans are proposing to pay for 1099 repeal on the backs of middle-income families. They can dance around the issue all they want, but it is clear as day that this would raise taxes.”

President Obama's budget proposal, which the White House released on Monday, proposes to remove the expanded 1099 reporting requirements for goods, but not for services of over $600 a year paid to corporations.