Congressman Praises NACM’s Grassroots Efforts

The efforts of NACM to repeal a 3% withholding tax on the value of most government contracts were recognized recently by Rep. Kendrick Meek (D-FL). Meek, along with Wally Herger (R-CA), sponsored H.R. 1023, the Withholding Tax Relief Act of 2007, which, if enacted, would repeal this withholding tax scheduled to go into effect Jan. 1, 2011. Meek pointed to the importance of the grassroots efforts of various businesses, business associations and state and local government coalitions that have mobilized to support H.R. 1023. “NACM is really doing a great job in building support for this legislation,” Meek said. “To move this legislation, we’re going to need all the support we can get, and grassroots lobbying from your membership is a central piece of that effort.”
 
The work of Meek and Herger, as well as the numerous groups who support their legislation, has apparently gotten the attention of many of their Congressional colleagues. The bi-partisan bill has, as of August 14, 2007, 188 cosponsors, which is equal to 43% of the entire 435-member U.S. House of Representatives. H.R. 1023 is still in the Committee on Ways and Means where it was originally referred.

History of the 3% Withholding Tax

The future implementation of the 3% withholding tax on most government contracts is authorized by section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222). Section 511 of this legislation escaped the attention of the media and most members of Congress when President Bush signed it into law on May 17, 2006. A June 20, 2007 article in CongressNow reported that, “Herger described its inclusion in the 2005 tax bill as a “bit of mystery.” The provision, he said, was the product of back-room negotiations between conferees and was not communicated to members when the conference report was presented for final passage. He further posited that conferees “must have known the measure was unjust because they postponed its activation to 2011.”

The reason for the implementation of the 3% withholding tax was to help balance the budget with this new revenue source. The apparent justification to apply this tax withholding mechanism to government contractors was that some of them have been found to not be paying their full share of federal withholding tax. Therefore, withholding 3% from their contract payments is a way the federal government can be guaranteed to get at least some of the applicable federal taxes owed by government contractors who fail to pay; others contend that the 3% withholding tax unfairly casts a wide net on all government contractors, most of whom pay their fair share of federal taxes. In that same CongressNow article, Meek was quoted as saying, “The 3% withholding provision paints all taxpayers that provide goods or services to governments as would-be criminals, which could both drive up the cost of doing business and increase the price of goods and services purchased by governments.” The article further stated, “The assumption behind the provision was that contractors hired by governments don’t always pay their assigned share of taxes. But that assumption is wrong, Meek argued, deeming the 3% hold an interest-free loan to the federal government that instead should go to the businesses providing aid to governments.”

Reasons for Opposition to 3% Withholding Tax

NACM and other businesses, associations and groups opposed to the 3% withholding tax on several grounds. The reasons NACM cites are:

1. This will adversely impact many businesses, which do not have the administrative or financial capacity to withstand a new 3% withholding tax.

2.  This new 3% withholding tax is inherently unfair and potentially financially debilitating because it is not a progressive tax. Therefore, it will place a proportionately higher financial burden on all businesses engaging in commerce with government. This places an undue burden on the already-squeezed cash flows of many small- and medium-sized businesses.

3. This new 3% withholding tax may force those who currently do business with federal, state and larger local governments to cease doing business with them. Such a result will lead to less competition for government business, driving up prices that the government has to pay for goods and services. This could ultimately lead to having to impose higher taxes on all taxpayers.

4. It could further weaken the U.S. economy, which depends a great deal on new jobs and economic growth created by all business, including the small- and medium-sized businesses that are largely responsible for new job creation.

Continue the Support for H.R. 1023