Tax Crisis Averted as 109th Congress Comes to an End
The 109th Congress adjourned on December 9th, at 3:30 a.m., ending the reign of the Republican Party and the Congressional agenda of 2006. However, the last hours of the 109th proved to be some of the most critical for mason contractors and the construction industry in general.
In May 2006 the President signed legislation making permanent some of the tax cuts instituted by congress at the beginning of 2004. Included in that package was a provision that was added at the very last minute, unbeknownst to many Members of Congress and their staffs. Inserted in the Tax Increase Prevention and Reconciliation Act of 2005 is a sweeping new requirement mandating a 3% tax withholding on payments to contractors for goods and services provided to federal, state, and local governments.
Late in the afternoon on Friday December 8th, Congressman Greg Walden (R-OR) introduced legislation which would have moved the effective date of Section 511 of the tax code to January 1, 2007 from its original enactment date of 2011. Congressman Walden together with Republican leadership planned for the legislation to be considered for a last minute floor vote.
This move was made in an attempt to go unnoticed and be unopposed by groups such as MCAA. It was brought to our attention late Friday afternoon after close of business for most places, that an effort was underway to establish a “Rural Schools and Communities Trust Fund.” In order to provide a source of funding for this trust fund Representatives were proposing implementing the 3% tax withholding almost immediately. This move was made in hope of catching business groups and trade associations off guard, leaving them no chance to lobby Members of Congress to oppose this potentially damaging tax. Fortunately we were warned in time and were able to blanket Capitol Hill with phone calls and emails to congressional offices. The majority of Friday evening was spent on the phone with congressional staff providing education and information regarding this provision. Around 10:00 p.m. on Friday night we believed that the provision had been killed thanks to efforts from various business organizations as well as associations such as MCAA, the Roofing Contractors, Associated Builders and Contractors, Associated General Contractors and the Plumbing Heating and Cooling Contractors to name a few. However, in the wee hours of the morning on Saturday, shortly before Congress adjourned for the year, the provision found new life and was introduced again under a “Unanimous Consent” agreement, meaning that if no one objected the provision would automatically pass. Thankfully, Congressman Kenny Hulshof of Missouri had been made aware of what was taking place and was able to oppose the provision. This was a very close call for not only Mason Contractors but everyone one in the construction industry who participates in government contracts.
As previously stated, Section 511 of the tax code (signed into law in May 2006) requires 3% withholding of the entire cost of contracts performed for federal, state and local entities. This is especially onerous for construction services where the average profit margin is less than 2%. This withholding has been compared to the withholding required on a paycheck – it is not. It is entirely different and much more onerous. The withholding does not apply to the profit expected or even realized from the contract; it applies to the total contract amount. The lack of specificity in the provision will cause problems for all levels of government as they struggle to implement the provision.
The key issues Congress should be concerned with include: the impact the 3 percent withholding mandate will have on small business cash flow, and their ability to effectively compete for government contracts. This will take away much needed and often essential operating funds, used to buy supplies, pay workers as well as overall administrative expenses associated with government contracts. In addition, this provision could potentially, severely limit the pool of contractors who currently bid and secure government contracts. This provision certainly would not make bidding on a government contract attractive to Mason Contractors. There will also be the added hassle of bookkeeping, placing another incredible burden on the businesses doing the work.
There are many groups including MCAA that are actively working to have this provision repealed. The provision as stated by the law currently implements the tax beginning in the year 2011. The only certainty is that cash flow for Mason Contractors will likely be negatively impacted as contractors are forced to significantly overpay their taxes and wait for repayment. Essentially, contractors would be floating the government an interest free loan for a period of time. While the provision may be designed to enhance tax compliance, its implementation will likely be a significant punishment to contractors who already comply with tax laws. It is unfair to inflict this maximum penalty on contractors who are already in compliance.
About the Author
Jessica Johnson Bennett was the Director of Government Affairs for MCAA. She has an extensive background in public affairs and government relations. Her expertise in strategic planning, PAC management and operations help on key policy issues.