If 1099 turns out to be true, I think it's USB trying to put a "cap" on the rather generous 4% rewards (for any spend). While this will likely turn away those who might somehow turn this into a goldmine, it would still attract people who values simplifying their CC spending by turning to this card. I think it's intended to capture a targeted group of clients. While the actual "cost" of taxing the reward might be smaller than what I initially thought, the difference between what I can earn now at 2.62% will likely be not worth the effort, especially when I am fine with mixing and matching other cards that offer 5% or so on certain categories.
LAX
there are a few dps on reddit that USB issued 1099 for some of their other cards/accounts too. so it would seem like it's their SOP to do so. i wouldnt say it puts a "cap" since they can easily just limit CL, which means everything simpler, and USB is also known for low CL.