More calls for repeal of tax withholding rule
May 27, 2011
Washington Business Journal
Jill R. Aitoro
Between delays, industry objections and congressional calls for repeal, it seems unlikely that a provision to withhold 3 percent of contractor payments for income tax will actually go into effect.
As expected, members of the Small Business and Way and Means committees called for repeal of the regulation Thursday, following a hearing to examine the effect of the withholding on small businesses.
"Instead of rewarding those small businesses that choose to compete for and win contracts, the government essentially pre-accuses them of cheating on their taxes and withholds 3 percent of all payments," said Rep. Mick Mulvaney, R-S.C., chairman of the Small Business Subcommittee on Contracting and Workforce. "This is flat-out wrong and this burdensome requirement should be repealed.”
This latest development follows many other calls to eliminate the requirement, which officially became law in 2005 with passage of the Tax Increase Prevention and Reconciliation Act. According to legislation, the withholding was to become effective Jan. 1, 2011. But then fast forward to 2009, when the American Recovery and Reinvestment Act delayed the provision a year to January 2012, and again to May 9, when the Internal Revenue Service postponed the regulation's start date again — this time to December 31 2012.
Beyond schedule delays, the provision has inspired loud outcry from industry, with more than 100 associations that represent the contracting community repeatedly calling for its repeal and detailing how it would harm businesses — most notably the small ones, that would experience major cash flow problems. These groups have also noted that a number of new legislative and regulatory measures have been put in place since the law was passed to increase tax compliance, including requirements for contracting officers and grant officials to verify prospective contractors legal compliance with tax laws, and contractors to certify that they have no delinquent federal taxes.
So is this provision destined to die? The Obama Administration supported the most recent delay, though only because it felt agencies needed more time to prepare. That said, Sens. Scott Brown, R-Mass., and David Vitter, R-La., introduced separate bills to repeal the provision, and Rep. Wally Herger, D-Calif., sponsored a similar version in the House. Such bipartisan support bodes well for those that would like to see this rule disappear.
On the other hand, reports like the one that was released Tuesday from the Government Accountability Office, pointing to $757 million in unpaid taxes from contract and grant recipients of stimulus funds, don't help. That will give those in support of the provision something to hang their hat on.