By Editorial Board Monday, November 29th, 2010

The so-called “1099 rule” was a disaster waiting to happen.

Happily, it is a disaster that looks like it will be averted. News shortly before Thanksgiving that the U.S. Small Business Administration was publicly opposing the rule seems to be the last nail in the coffin for this ill-conceived tax on entrepreneurship.

As the Business Times reported two weeks ago, the 1099 rule came about as a way for the government to rake in an estimated $13 billion to cover the cost of health care reform.

The rule would have required small businesses to file 1099 forms with the Internal Revenue Service for any vendor who purchases more than $600 in services. That means restaurants, hotels, caterers and office supply shops would have been inundated with paperwork from their customers.

Meanwhile, the IRS had no mechanism for sorting through the forms, people would have been at liberty to ignore them and millions upon millions of documents would have piled up at a cost of millions of dollars to struggling small businesses.

As word about the 1099 rule spread during the mid-term election campaign, it found fewer and fewer friends. The U.S. Chamber of Commerce and National Federation of Independent Business were early foes.

The U.S. Treasury Department was skeptical of the rule, too, as were mainstream Democrats in Congress, including U.S. Rep. Lois Capps, D-Santa Barbara. President Barack Obama signaled his opposition as well, and then his administration’s SBA followed suit.

The SBA’s opposition pretty much guarantees that the 1099 rule will not be put into effect. Its suspension will give credence to arguments from the Obama administration that health care reform can be modified to be more effective.

But its suspension also will lend support to arguments that “Obamacare” was shoved down America’s throat through budget reconciliation and that it should be fully repealed.

What about the nation’s small businesses? So far, they have correctly weighed in against the 1099 rule, which was always going to be too cumbersome to implement.

But they also seem to be embracing and utilizing tax credits that were designed to reward companies with fewer than 20 employees for providing health care coverage.

Small business owners may be both more powerful and smarter than politicians assume.

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