Reasons for Opposition
to H.R. 4297 and Support of S. 2821

Section 511 of H.R. 4297, known as the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), escaped the attention of the media and most members of Congress when President Bush signed it into law on May 17, 2006. Section 511 of this law imposed a new 3 percent withholding tax on the value of most contracts for goods and services between businesses and federal and state governments as well as local political subdivisions with contracting expenditures of $100 million or more. This new withholding tax will impose a severe financial strain on all businesses that rely on government business. It will be especially burdensome to many small- and medium-sized businesses that exist on very tight cash flows and simply can't afford this new and additional tax. However, the hardship this new tax imposes affects all businesses that do business with government entities, no matter what their size.

Last year, when this issue was first brought to the attention of NACM, a Work Group convened to review and analyze the issue. The Work Group's findings and conclusions were presented to the NACM Board for its consideration of possible action to be taken on the matter. On March 18, 2005, the NACM Board voted to oppose this new and unfair tax. The NACM Board concluded:

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

2. This new 3 percent 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 percent 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.

When it appeared this section would not be part of any enacted legislation, efforts by NACM in opposition to it were placed on hold. However, now that the section unexpectedly found its way into a bill passed by Congress, and signed into law by President Bush, our program of opposition to it must be kicked into high gear.

Fortunately, there is hope that this new withholding tax can be repealed. On the same day that President Bush signed H.R. 4297 into law, U.S. Sen. Larry Craig (R-ID), introduced S. 2821, which repeals section 511 of the law, effectively eliminating this new 3 percent withholding tax. Therefore, we urge you to fax or e-mail your Senators as soon as possible to express your support of S. 2821. If we respond quickly, decisively and in a unified manner, we are confident the collective authority and energy of all of us will ring loudly throughout the Halls of Congress.

Let's get behind Sen. Craig's legislation and remove this unfair and burdensome new withholding tax! A little effort from as many of us as possible will go a long way towards possibly removing this additional burden on those of us who work hard to provide products and services to all levels of government.

Companion Bill to S. 2821 Introduced in the House

On Sept. 28, 2006 Rep. Wally Herger, (R-CA), introduced H.R. 6242, Withholding Tax Relief Act of 2006, which is a companion bill to Sen. Craig’s proposed legislation. It will accomplish the same objective of S. 2821 of repealing section 511 of the Tax Increase Prevention and Reconciliation Act of 2005, which imposed the 3 percent withholding tax on government contracts.

Darin Thacker, Communications Director for Rep. Herger, in a statement released to NACM said, "On Thursday evening, Congressman Herger introduced the Withholding Tax Relief Act of 2006 in the House of Representatives. The measure is a companion bill to S. 2831, by Senator Larry Craig of Idaho. Congressman Herger is concerned about the serious impact this provision will have on businesses that routinely provide goods and services to the federal, state and local governments. He believes we owe it to all honest taxpayers to ferret out non-compliance wherever it exists. But such efforts to bridge the ‘tax gap’ should be weighed first against new burdens on taxpayers."

NACM Joins Government Withholding Relief Coalition

The Government Withholding Relief Coalition (GWRC) is a group of organizations, under the leadership of the U.S. Chamber of Commerce, dedicated to repealing the 3 percent withholding tax. NACM is one of the members of the group. In addition to lending support to Sen. Craig’s S. 2821, the GWRC also supports Rep. Herger’s, H.R. 6242. In a statement, Chris Braddock, Associate Director, Procurement and Privatization Policy of the U.S. Chamber said, “Yesterday evening (Sept. 28, 2006) Congressman Herger introduced H.R. 6242 to repeal the 3 percent withholding requirement. It is a companion bill to Senator Craig’s bill and is a great marker in preparation for next year. This legislation can be used as a means to educate offices about the provision during the relative quiet before the elections in hopes of obtaining cosponsors during the lame duck sessions.”

On October 16, 2006 a letter was sent by members of the GWRC, including NACM, to Rep. Herger in support of his bill.