The Three Percent Withholding Law Termed the "Anti-Stimulus" Bill Goes Down in the House of Representatives

As discussed in our previous post [click here], the Federal Governments “Tax Increase Prevention and Reconciliation Act of 2005” amended Section 3402(t) of the Internal Revenue Code to require the mandatory withholding of three percent of all payments to contractors who provide goods and services to the government. The law applies to federal, state and local governments with an annual budget of $100 million and requires the three percent withholding from every contract payment exceeding $10,000. The three percent will be held by the government until the contractor files its income tax return and pays its taxes, which could be many months after the contractor’s performance of the contract work is completed. The ostensible purpose of the law is to collect underreported tax revenues and increase tax compliance of entities that perform public contracts. The Government Accountability Office (GAO) indicated that 27,000 contractors owed approximately $3 billion in taxes as of September 20, 2002. This new law was designed to ensure that businesses pay their income taxes to the IRS.

Contractor groups have dubbed this withholding statute an “anti-stimulus bill.” With construction contractors’ profit margins averaging three percent or less on public contracts, the government’s withholding of 100 percent of a contractor’s profit even though the tax liability is maybe only a fraction of that amount is regressive. Two-thirds of AGC members polled indicated that were the law to go into effect, they would Not make any profit for at least a year on publicly-funded projects. See AGC Constructor September/October 2011 “Creating the Anti-Stimulus.” The cost of contractors borrowing capital will simply be passed on to the federal government (tax payers) in the form of higher bid prices in the future. It is also likely that general contractors faced with this type of withholding will apply similar withholding to their subcontractors further increasing the cost to the government tax payers in the long run. As reported by Mike Purdy in his blog on Friday, October 28, 2011, the House of Representative thwarted the bill by voting overwhelmingly on Thursday October 27, 2011, 405 to 16 to repeal the 2005 law, click here.

The Senate voted to close debate on the legislation in recent weeks but came up three votes shy of the 60 needed for closure and allow for a vote. If your senator voted against repeal (click here for “nay” votes), they need to hear from you immediately. (Senators Murray and Cantwell were “nay” votes).

Senator Reid filed closure late last week on the legislation, so another closure vote (which ends debate and allows for a vote on the legislation) is slated to be held today (Monday, November 7) at approximately 5:30 p.m. 

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