Last night the Senate rejected an attempt to repeal the health care reform law. However, what they did repeal – and more important, how they paid for it – provides a signal for how the deficit debate will go on Capitol Hill. And it’s not a particularly good signal.

All Democrats voting held together against the full repeal, and all Republicans voted for repeal. Joe Lieberman and Mark Warner missed the vote. As I predicted, the Senate needed 60 votes to pass repeal because of a Budget Act point of order; repeal would have increased the deficit by $230 billion in the first 10 years.

However, Republicans were successful on repealing one element of the law yesterday:

Just before the vote on the budgetary point of order, the Senate did vote to repeal an unpopular part of the healthcare law that requires businesses to report annual purchases of goods and services of more than $600 to each vendor.

The Senate voted 81-17 to eliminate the 1099 reporting requirement, with 17 Democrats voting against the measure.

Here’s the roll call. Now, love the 1099 requirement or hate it, the idea behind it was to increase tax collection. The IRS would get all these 1099s and be able to see who owed tax on these transactions. CBO estimated that it would add $19 billion to the federal Treasury over 10 years.

The amendment replaces that revenue. How? Through the “rescission of unspent funds to offset the loss in revenue”, according to the amendment’s language. It requires the Office of Management and Budget to determine and identify the amounts of the “unobligated funds” to rescind from each part of the budget. Only the Department of Defense, the Department of Veterans Affairs and the Social Security Administration cannot be touched by OMB.

This is exactly the pay-for that Mike Johanns (R-NE) used the last time he authored an amendment to repeal the 1099 requirement; the only difference is the exemption of those three departments. It’s a cowardly way to cut spending, as it puts the burden on OMB, actually delegating the power of the purse to the executive branch. But it does cut spending, by $19 billion over 10 years. So what we end up with is a revenue increase, which basically derives from the closing of a tax loophole that enables cheating, replaced by spending cuts. Democrats tried a separate amendment to pay for 1099 reporting repeal with ending tax subsidies for Big Oil, and only got 44 votes. So they went with the Republican pay-for.

This trajectory will be a familiar one come the showdowns on the budget. Democrats are perfectly willing to cut taxes and trim spending – that’s basically what this amendment does, and it got 81 votes, with 34 Democrats in favor.