3% Withholding Finally Is Repealed
One of the worst things about Washington, D.C., is how often the federal government enacts well-intentioned laws and regulations without stopping to think how they will affect small businesses and job creation. As someone who came from a small business background, I became interested in public policy, because I saw what the government was doing to me – not what they were doing for me. The good news is that the American people have sent more people to Congress who understand that all of this red tape is hurting our economy, and needs to be rolled back.
On Nov. 21, President Obama signed into law legislation that I authored (H.R. 674), along with the support of our principal Democrat co-sponsor, Oregon Congressman Earl Blumenauer, to repeal the 3% withholding tax on government contractors. This is a major victory for job creators across the nation. As you may know, the 3% withholding provision would have required government agencies to withhold 3 percent of all payments for goods and services as an advance against a contractor’s federal income tax liability. Like many bad ideas, the 3% withholding tax had a noble goal. It was intended to catch government contractors who were failing to pay their taxes. I certainly believe it is a very real and serious problem when contractors do not pay their taxes, but it makes no sense to punish hundreds of thousands of small business who do pay their taxes, just to catch a small handful of crooks. Instead, we should be strengthening the programs that already exist, to assure tax cheats do not get awarded contracts in the first place.
In practice, the 3% withholding tax would have had a devastating impact on small businesses and jobs. Since many businesses operate on margins of less than 3 percent, the withholding tax would have hurt their cash flow and, effectively, forced them to give the federal government a no-interest loan. As one business owner explained in a letter to Congress: “The way the economy is now, we are lucky to make 3 percent profit. This could put us out of business, along with our 300-plus employees.”
Allowing 3% withholding to be implemented also would have raised costs for government agencies, many of whom would be adding the costs of a new collections system accommodating withholding on to a budget that was already facing severe cuts. A Department of Defense study found that the cost of implementation for DOD, alone, would have been $17 billion – far more than the approximately $10 billion that the tax was projected to raise in new revenue for the federal government.
Given the widespread and damaging consequences of the 3% withholding tax, it is not surprising that more than 150 businesses, healthcare, education and local government groups supported the passage of legislation to repeal it. I first introduced repeal legislation in September 2006, and I know that this victory could not have been achieved without the countless hours of hard work from the members of the Government Withholding Relief Coalition. The Mason Contractors Association of America has been a key proponent of the repeal effort, and your support was an important part of getting the bill passed through Congress.
When the House and Senate passed H.R. 674 by unanimous votes, it demonstrated that both parties can work together to encourage job creation. Although this is only one step in getting our nation back to work, it’s an important one that will make it easier for contractors and vendors to create jobs throughout our country.