Businesses Encouraged by Vote to Repeal 3 Percent Withholding Rule
By Heather M. Rothman
Publication Date: 08/25/2011
Businesses were encouraged Aug. 24 by a promise for a vote on a measure to repeal a law that requires federal, state, and local governments to withhold 3 percent from payments for goods and services.
These businesses, which have been fighting since 2006 to keep the law from going into effect, noted the strong bipartisan support that repeal has in both chambers.
In announcing Aug. 23 that the House would vote to repeal the measure later this fall, House Majority Leader Eric Cantor (R-Va.) called the law—scheduled to go into effect in 2013—an “unnecessary tax increase on those who do business with the government”.
There are currently three repeal bills pending in the 112th Congress.
One measure (H.R. 674), by Ways and Means Committee member Wally Herger (R-Calif.), and its companion bill (S. 89), written by Sen. David Vitter (R-La.), would repeal the withholding provision but not pay for it.
Another Senate bill (S.164), written by Sen. Scott Brown (R-Mass.), would repeal the provision and pay for it by rescinding $39 billion in unobligated discretionary funds.
“With 226 co-sponsors on Congressman Herger's bill, we have strong, bipartisan support in the House to repeal the three percent withholding tax,” said Steve Lutes, the director of the Corporate Leadership Advisory Council at the U.S. Chamber of Commerce as well as the Government Withholding Relief Coalition.
“This sort of support demonstrates an understanding on both sides of the aisle of the harmful impact this mandate will have on job creators as well as state and local governments. We're certainly encouraged by Majority Leader Cantor's remarks and the overall support we've built for repeal in Congress,” Lutes told BNA in an Aug. 24 e-mail.
Impact of Implementation
Members of the coalition—including the Air Conditioning Contractors of America, the Federation of American Hospitals, the National Institute of Governmental Purchasing, Miami Dade County, and the United States Telecom Association—say the withholding will impact a company's cash flow and inhibit day-to-day operations and job creation while floating the federal government an interest-free loan.
Terry Neimeyer, chief executive officer and chairman of the board of KCI Technologies in Sparks, Md., told BNA Aug. 24 that if implemented, the law would be a constant cycle of his business having fewer funds to spend because they would be withheld one year, recouped the following year, but then also withheld again. From a cash-flow basis, he said it would leave him with 3 percent less to spend, impeding his day-to-day operations and his growth, and resulting in a deferral of purchases.
But it would not just affect companies of his size, he said. His consulting engineering business does work in several communities where it subcontracts to minority-owned and women-owned businesses. Those smaller firms, he said, also would be subject to the 3 percent withholding. As a larger company, the withholding would be “painful but could be absorbed,” he said. But for those smaller firms, “the impact to them would be rather monumental because they do not really carry extra capital capacity,” he said
“Another important aspect to consider is that to comply with this unfunded mandate, state and local governments will have to spend scarce resources to administer this program,” Lutes said. “In addition to the business community, the voices of state and local governments are a critical part of our coalition as they highlight how implementing the three percent withholding tax will further stress their already strained budgets.”
Law Has History of Changes
The withholding requirement was created under the Tax Increase Prevention and Reconciliation Act of 2005 (Pub. L. No. 109-222), with an implementation date of Jan. 1, 2011, as a way to help prevent tax avoidance. Specifically, lawmakers believed that they could help close a roughly $300 billion annual tax gap by reducing the number of opportunities that contractors may have to leave income unreported, but its implementation date has been pushed back twice as lawmakers ponder whether it should be repealed.
The complete text of this article can be found in the BNA Daily Tax Report, August 25, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2011, The Bureau of National Affairs, Inc.