The Senate rejected a motion to end debate yesterday on a bill that would repeal the 3% withholding tax, set to go into effect on government contracts in 2013.

Earlier this week, Senate Minority Leader Mitch McConnell (R-KY) quietly introduced S. 1726, the Withholding Tax Relief Act of 2011, which is nearly identical to H.R. 674, a repeal measure in the House of Representatives that was recently voted out of the Ways and Means Committee with overwhelming support. McConnell moved for cloture on S. 1726, meaning consideration of the bill would end and the legislation could proceed further, but the motion failed in a 57-43 vote. Cloture ultimately requires three-fifths of the full Senate, or at least 60 votes.

While the House is expected to vote, and likely approve, H.R. 674 next week, the failure of the Senate’s cloture vote indicates that the entire repeal effort risks falling victim to a severe party-line divide and partisan gamesmanship.

The failed cloture vote in the Senate came along with another failed vote on a portion of the American Jobs Act, a bill championed by President Barack Obama. Senate Republicans, joined by three conservative Democrats, blocked a bill, S. 1723, the Teacher and First Responder Stabilization Act, taken from a portion of the full American Jobs Act that would’ve given states money to hire or retain teachers, police, firefighters and other emergency responders.

By carving this section of the bill out and forcing Republicans to vote on it, and reject it, Senate Democrats now have a talking point with which to hammer conservatives, arguing that they are unwilling to support tax increases for millionaires, even if those tax increases would help keep teachers and emergency responders employed.

Similarly, McConnell’s decision to isolate the 3% withholding repeal in S. 1726 gives Republicans a chance to portray Democrats, all but 10 of whom voted against the measure, as anti-business and to suggest that the entire party is committed more to taxes than economic growth.

The 3% withholding repeal, which not too long ago may have seemed like a bipartisan slam-dunk, now hangs in the balance.

Originally enacted as part of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005, the 3% withholding tax will apply to payments from local, state and federal government entities to their contractors starting in 2013. While provision’s goal was originally to address the nation's tax gap, which represents the annual $345 billion in taxes legally owed but left uncollected, and ultimately address contractor tax compliance, the provision punishes all government contractors, rather than just those that flout their tax requirements. The provision would wreak havoc on the cash flow of companies that do business with government entities, especially smaller businesses, upon whom the burden would fall hardest.

NACM has opposed the 3% withholding tax since its introduction and hopes that both parties can reach an agreement resulting in the end of this harmful provision. For more information on NACM’s effort to repeal the 3% withholding tax, click here.

Jacob Barron, CICP, NACM staff writer

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