Small but Important

How an obscure provision in the health care law turned small business against Obama and the Democrats.

Small businesses feel the burdens of the health care legislation more than the benefits

Even if Democrats beat expectations at the polls today, they will do so without the support of one of those quintessentially American constituencies: small-business owners. As a bloc, these owners vote—about 93 percent plan to head to the polls today, compared with about 41 percent of eligible voters overall—and they tend to support Republicans.

Which is not to say that Democrats haven’t been trying to win them over. Last week, President Obama stopped by a small Rhode Island manufacturer, American Cord & Webbing Co., to applaud the country’s small businesses and to tout the administration’s policies to aid them. The president stressed that the administration and Congress support small businesses, which created about two of every three new jobs over the past decade. (They’ve also lost about as many, though politicians generally omit that part.) He pointed to the 16 tax breaks Democrats passed for small businesses in the American Recovery and Reinvestment Act in 2009 and the Small Business Jobs Act, which Democrats passed over a Republican filibuster in September. In just six weeks, Obama said, that jobs act has helped 3,600 small businesses get $1.4 billion in loans.

But according to an October survey by Sage North America, just 7 percent of small business owners think the government is doing enough to boost the economy. Just one in six says that they benefited from the 2009 stimulus bill. And just 23 percent of small-business owners polled said they were even aware of the contents of the Small Business Jobs Act, chock full of provisions to gin up investment and cut taxes for small companies. Among those aware, only a quarter said it would help them.

So how did the Obama administration lose small business? In part because, while it lowered taxes on virtually all companies with small workforces, relatively few of their owners know that. At the same time, it increased the regulatory burden—something that drives small-business owners crazy—in a small but hugely noticeable way.

The issue is the 1099 provision of the health care law the president signed last spring. The portion of the law was designed to improve compliance with the tax code. But it means a whole lot more paperwork—paperwork that is particularly onerous for small companies with lower margins and higher overhead costs to begin with.

Before the health care bill came into existence, businesses needed to send 1099 forms to the non-incorporated businesses that provide them with more than $600 in servicesper year. Now, businesses need to file 1099s to any business that provides them more than $600 in goods or services per year. A nearby restaurant where you have six $100 business lunches per year? You need to get their tax identification number and then fill out a 1099. Purchase $600 in office chairs? 1099.

The reporting requirement has met with virulent resistance on many fronts. The National Federation of Small Businesses, for instance, has lobbied against the provision, saying it might cost more in compliance than it will raise in revenue. “[Congress] must think it’s appropriate to punish all small business owners with needless and costly new paperwork for the slight possibility that this new reporting requirement may help the government capture some unreported revenue,” NFIB wrote in September. “They are punishing all small business owners for this slim chance that they may catch a few business owners who might make a mistake on their tax forms. It’s ludicrous.”

And it isn’t just small-business lobbyists pushing against the change. The Taxpayer Advocate Service, an independent office within the Internal Revenue Service, does not support it either. For one, it will overburden businesses, the advocate wrote in a report to Congress. On top of that, the IRS won’t be able to handle the paperwork—given that 40 million businesses, total, will be subject to the requirement, adding possibly hundreds of millions of forms to the tax-agency’s files.

Most important, the provision has scant support at either end of Pennsylvania Avenue. Democrats and Republicans in Congress and the Treasury have all spoken out against it. Members of both parties have repeatedly tried to change the rule. They just have not managed to agree on how to raise the revenue that would be lost if the provision is eliminated.

But Congress and the administration are not getting credit for their efforts: Small businesses remain incensed about the 1099 change, and provisions more helpful to small business in the health care bill remain obscure. For instance, the bill offers subsidies to help small companies purchase health insurance for their workers. One provision subsidizes up to 35 percent of a company’s insurance premiums, starting next year. Up to 4 million workers might qualify. It has already had a demonstrable impact. According to Bernstein Research, the number of very small companies—with three to nine workers—offering health care jumped from 46 percent last year to 59 percent this year, even amid the deep economic slump. But it has not attracted nearly the notice the 1099 change has.

For small businesses, the focus remains on the burdens of the bill. And the real reason small-business owners tend to want to get Democrats out of office lies far beyond regulatory changes: The economy is terrible, and small-businesses have suffered through the recession and recovery. Though banks are sitting on more than $1 trillion in spare capital, with the government providing generous loan-backing and other incentives, credit remains tight. And despite a (slowly) recovering economy, business has not picked up for many small companies.

That’s the central fact for small-business owners. Just 6 percent of respondents to the Sage poll said they anticipated business improving in the next six months. Three in four said they were not sure when business would get better or that it would improve after a year. With so little confidence, there’s probably no amount of subsidies that could help.

Like Slate on Facebook. Follow us on Twitter.