Tax Consequences Of Durbin

I was listening to a report on NPR this morning about fisherman in Louisiana who are having trouble submitting a claim to BP.   It turns out that in many of the rural areas of region, fisherman will sell their catch on the docks for cash, most of which is paid out, again in cash, as wages to crew and for fuel and supplies.    Because few records exist, it is difficult to document their losses due to the BP oil spill.  Normally, most businesses would have tax records that would be easy to produce, but the story indicated that “Cash is king in the fishing industry.”

Cash And Durbin

The Durbin Amendment to the financial reform act will have many consequences.   When credit and debit card processors can no longer require their merchants to offer the same price for credit and debit as they do for cash, many are expected to offer a substantial cash discount.  A inevitable side effect of so many people paying with cash is that we might see the rest of the country become more like the rural areas along the Gulf of Mexico.   Small businesses will be especially prone to under reporting their revenue when it is in the form of cash.

One of the benefits of purchasing with credit and debit cards is the documentation produced by the accepting networks.   For a merchant, this documentation may be one of the things that has traditionally kept them honest when it came time to submit their taxes.   It is very possible that many small businesses might offer a significant cash discount, far greater than than the so called “swipe fees”, in the hopes that their real savings will come when they do not report their cash transactions.

Ultimately, if governments start seeing less and less tax revenue, they will have to cut services or raise taxes, a predicament currently facing most city, county and state governments due to the current recession.

It is not the purpose of credit and debit cards to act as a check against tax evaders, it just happens to be one of the side effects of the system.    Now that we are  throwing out the merchant supported system, and the incentive will be to pay with cash, it will be interesting to see how sales tax collection copes with a return to an influx of cash transactions not seen in the last fifty years.