STATEMENT
Of the Honorable Nydia M. Velazquez, Chairwoman
United States House of Representatives, Committee on Small Business
Full Committee Hearing: “Electronic Payments Tax Reporting: Another Tax Burden
for Small Businesses”
June 12, 2008

Among its duties, this Committee is charged with evaluating the impact of legislative proposals on the nation’s small businesses.  That includes policy consequences ranging from health care and energy to transportation and taxation. 

The bulk of these proposals are crafted with the best of intentions, and this panel has supported many of them.  On occasions, we also face policies that appear innocuous—and may have laudable goals—but have detrimental impacts on small firms. Today we will examine one such proposal, requiring small business tax reporting on credit card receipts.

A little more than a year ago, this Congress—under Democratic leadership—wisely reinstated the budget rule known as PAYGO.  It requires all new spending—including tax cuts—to be made revenue neutral.  The restoring of PAYGO signals a firm commitment to fiscal responsibility, and makes clear that any new spending must be paid for. 

These rules fundamentally change the way in which we discuss new proposals.  Evaluating underlying policies remains key, but PAYGO implications must also be considered.  Today’s hearing to examine requiring  small business tax reporting on electronic payments is just such a case. 

The proposal has been broached in various forums and, over the past year, it was even suggested as a means of helping pay for the Farm Bill.  Promises of viable offsets are always tempting.  But this proposal raises significant technical and financial challenges for banks and entrepreneurs alike. 

In today’s fast-paced marketplace, electronic payment systems are integral to the daily workings of the U.S. economy.  They link merchants, consumers and banks through secure means that are both efficient and convenient.

As we will hear today, the administrative and financial burdens associated with the reporting requirements of this proposal are indeed significant.  They might even be justified if the tradeoff for small businesses was greater certainty.  But the opposite is true. 

The proposal is built on an incorrect premise—that electronic payments foreshadow profits.  The reality is quite different for most small businesses.  Electronic transactions bear little relation to actual income—especially when charge-backs, merchant discounts, and other fees are accounted for.  The result is that even careful compliance by entrepreneurs could lead to costly IRS audits.

At a time when data security is being challenged constantly, the new reporting requirements also pose serious privacy risks for millions of citizens.  For many small firms, the owner’s Social Security number is used by the IRS to track the revenue and tax compliance of their business.  Under this proposal, banks would have to include that same information in their reports, which could leave important personal data exposed to identity thieves and other criminals.

Equally troubling is the provision to withhold 28% of credit card payment reimbursements to enforce compliance.  Banks would be required to withhold the amount from each entrepreneur whose personal information is not collected in time. 

That means if a bank sends out a mass mailing asking small business owners for their social security numbers, those that don’t receive the letter would see 28% of their credit card revenue withheld.  For every $100,000 in credit card sales, their business would receive just $72,000.  For many businesses whose profit margins are between 3% and 5% that can mean the difference between making payroll and having to permanently close their doors.

In short, what at first sounds like a promising budget offset, has very real costs for the nation’s small business economy.  These unintended consequences are exactly what we must keep in mind during the consideration of such proposals.  After all, even in a PAYGO environment, we cannot afford to focus blindly on revenue figures while creating unreasonable costs for the small firms that drive economic growth.