The 3 Percent Withholding Tax on Contractors Should Be Repealed
Unless Congress acts, the masonry industry and any other sector that does government contract work will face a new tax increase and administrative burden. Beginning in 2011, all levels of government will be required to withhold 3 percent from the payment of goods or services contracts. I’ve heard from many business owners and local officials in Louisiana about the negative effects this requirement will have, so I wanted to inform you of why I am fighting to repeal it before its damage is done.
Added in 2005 at the last minute to a must-pass bill, this new withholding requirement will cause sweeping changes to how contractors are taxed and how local governments pay contractors. Described as a “revenue offset,” this provision was included without taking into account the negative effects on the masonry and other industries.
First, this new tax will cause a major unfunded mandate on state and local governments. It simply leaves this administrative nightmare to the state and local officials to handle, without any assistance to pay for extra burden. When local budgets for police, fire, roads, schools, and other essential services are stretched thin, adding a major new cost to our states and municipalities is the last thing we should do.
Second, this new withholding seems to be based on an arbitrary figure. The 3 percent figure may sound small to government bureaucrats and regulators, but I have heard from many contractors about how this withholding could severely restrict cash flow. Also, the withholding is expected to often exceed the amount of tax actually owed, since it will be calculated from the gross contract price, not an estimate of net taxable income. Cash flow will be restricted, making it harder to hire employees, pay wages, pay subcontractors, obtain coverage for bonds, and more. We definitely shouldn’t reduce the ability of businesses to grow and add jobs during an economic downturn.
Finally, this new tax is simply unfair. It was enacted to supposedly go after business owners who cheat on their taxes, but instead it punishes all honest contractors. I am sure we all agree that the IRS should improve its efforts to catch tax evaders, but creating an additional burden to honest contractors is not the way to achieve that goal.
There is still time to stop this menace before it becomes effective. That’s why I am working now to repeal it. I am thankful for this opportunity to discuss this important issue and look forward to working with the masonry industry to support policies that will help our economy grow.