According to former U.S. Rep. Dick Armey, FreedomWorks chairman, the provision requiring payment-card reporting to the IRS would have an

astonishing reach, and it was slipped into the [Senate Housing] bill [last] week. Not only does it affect nearly every credit card transaction in America, such as Visa, MasterCard, Discover, and American Express, but the bill specifically targets payment systems like eBay’s PayPal, Amazon, and Google Checkout that are used by many small online businesses. The privacy implications for America’s small businesses are breathtaking.

Rarely have I agreed with Rep. Armey, and my concerns are focused more on privacy and data security concerns for individuals than his. But my initial reaction is that this has frighteningly large ramifications and we need to get it publicized before it gets swept into law under the cover of foreclosure relief.

Sometimes called the “e-bay reporting provision,” this legislation has a goal of improving collection of taxes on income underreported by small business, estimated to cost the government as much as $150 billion dollars annually. Apparently it was inserted into pending bills in both branches of Congress last week.

The full Senate will be debating The Housing and Economic Recovery Act of 2008 this week. The 630-page bill was drafted by the Banking, Housing and Urban Affairs Committee, chaired by Senator Chris Dodd (D-CT). According to the FreedomWorks press release, the card-reporting provision was added last week without debate, and “would require the nation’s payment systems to track, aggregate, and report information on nearly every electronic transaction to the federal government.” Such language is not referenced in the bill’s summary or the Banking Committee’s Statements of Favorable Reaction to the bill.

A piece by Phil Kerpan at National Review Online this morning asserted that payment-card reporting was added to the Alternative Minimum Tax Relief Act of 2008 last week by the House Ways and Means Committee, chaired by Charlie Rangel (D-NY).

Yet another committee, the House Small Business Committee, held a hearing on June 12 entitled, Electronic Payments Tax Reporting: Another Tax Burden for Small Businesses. Testimony from the five witnesses is linked: Kim Stubna, Director of Public Policy, First Data Corporation; Donald Boeding, Senior Vice President, Fifth Third Processing Solutions; David Sohn, Senior Policy Counsel, Center for Democracy and Technology; Todd McCracken, President, National Small Business Association; and, Kristie L. Darien, Executive Director, National Association of the Self-Employed (NASE). These witnesses (unsurprisingly) condemned the proposed legislation. Concluding that “[t]his proposal would do far more damage than good,” Chairwoman Nydia Velázquez (D-NY) wrote to Ways and Means Chairman Charlie Rangel (D-NY) and recommended further study. Her efforts apparently did not prevent the reporting provision from moving forward.

Most of the criticism I’ve read this morning on this provision has come from conservatives; but as best I can tell, the innovation was first proposed by President Bush in his 1996 2006 budget. That won’t keep it from being defined as a Democratic initiative. Per Phil Kerpen,

Payment-card reporting is another expensive bad idea from House Democrats. American taxpayers can only hope this extortion attempt fails, and that Congress passes AMT relief in a clean bill with no tax and regulatory hikes.

I haven’t had time to think through some of the ramifications; but as it stands, I think its a bad idea due to privacy concerns, data security concerns and a lack of sufficient analysis of costs and benefits. A proposal to send millions of individual transactions daily to a new IRS database is unlikely to be popular in today’s political environment. It’s also unlikely to be a good issue for Dems to run on in the fall, but if this passes our candidates will own it. So let’s get it publicized and examined now! Save us from our own legislation!