The American Recovery and Reinvestment Act, recently signed into law by President Barack Obama amid a swirl of Republican criticism, included a provision that delays the imposition of the 3% withholding tax initially passed in 2005. Instead of going into effect on all government contracts that occur after December 31, 2010, it will be delayed for one year, applying to all contracts awarded after December 31, 2011.
Bills aimed at eliminating the tax have been written and supported in both the House and the Senate in the prior Congress, but budgetary “pay-go” rules, which require any eliminated revenue measured be offset by the inclusion of another source of revenue, made passage difficult. “If you are going to provide tax relief in the code, you have to figure out a way to pay for it,” said NACM lobbyist Jim Wise of Pace, LLP. “Over the last two years, the only way they could figure out how to not enact the tax is by an accounting trick.”
By delaying the measure, rather than outright repealing it, Congress can spare businesses the tax without having to come up with an offsetting source of revenue. Even though support for the tax is almost non-existent on Capitol Hill, the permanent removal of the tax has remained elusive. “Nobody likes it but we can’t figure out a budget neutral way around this,” said Wise.
One of the earlier bills aimed at repealing the tax was co-authored by Congressman Wally Herger (R-CA) who noted earlier that the delay helps, but a full repeal is still the right course of action. "Three percent withholding repeal is an important and bipartisan effort. Should the withholding mandate go into effect, it will hurt business cash flows, increase costs and administrative burdens for local governments and increase the cost of compliance for the majority of taxpayers who already pay their fair share on time. While a one-year delay offers some relief, it does not provide certainty to businesses and local governments, which still must allocate scarce resources to prepare for the mandate's implementation in 2012,” said Herger. “Thus, I continue to support a full repeal and believe that, given the broad bipartisan support our legislation enjoys, it should be considered on its own merits. Fortunately, it appears that repealing the 3% withholding has support within Congress, and I look forward to continuing to work with Rep. Kendrick Meek (D-FL), the Committee, and the Government Withholding Relief Coalition to enact a full repeal."
NACM has opposed the tax since its original inclusion in the Tax Increase Prevention and Reconciliation Act of 2005 as an effort to reduce the nation’s tax gap, representing the nearly $350 billion in taxes owed but never collected. The tax will adversely impact many businesses and is especially unfair and potentially debilitating because it is not a progressive tax, meaning small- and medium-sized businesses will bear an undue burden. Should the tax ever go into effect, it could potentially discourage companies from seeking to do business with the U.S. government, reducing competition and driving up prices that the government has to pay for goods and services. It could also further depress the nation’s already too-fragile economy.
Jacob Barron, NACM staff writer