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November 24, 2009 7:00 AM CST

3% Withholding Provision for Contractors

Provision will increase the cost of doing business with governments

By

In 2006 Congress passed a bill that carried significant tax relief across the board, including an extension of the tax relief on capital gains and dividends and small business expensing. History repeatedly has shown that the American economy grows best when tax rates are low, and small businesses and individuals are able to decide how they spend their own money. This was a good bill, but at the last moment and behind closed doors, a damaging tax increase was added to this tax-relief legislation. This provision, known as 3-Percent Withholding, will impose a withholding tax of 3 percent on all payments to vendors that provide goods and services to governments at any level.

Since so many businesses contract with the government, from farmers who receive payments to contractors who work on government buildings, it will affect significantly small businesses all over the country and will be a job killer. It will impede cash flow for contractors already operating on a tight margin. With the construction industry already suffering from the economic downturn, imposing this additional tax penalty would be devastating.

The 3-percent withholding provision is scheduled to take effect in 2012. Unless it is repealed, it will end up increasing the cost of doing business with governments and, eventually, inflate the cost of goods and services for governments. For these reasons, during both the 110th and 111th Congresses, I have joined Rep. Kendrick Meek (Fla.) in proposing legislation to repeal the 3-percent withholding provision (H.R. 275) before it takes effect.

Together with the MCAA and the larger Government Withholding Relief Coalition, we successfully have added 124 members of the House of Representatives as cosponsors of this bill. We even were able to include it in the House-passed version of the economic stimulus bill earlier this year, but the Senate opted to substitute a one-year delay for full repeal. So, we still need your help in writing letters and contacting your individual members of the U.S. House and Senate.

The supporters of the 3-percent withholding provision argue that it is needed to crack down on contractors who are failing to report their income. However, the vast majority of contracting businesses are owned by honest, hardworking entrepreneurs who are careful to pay their taxes on time. For them, this withholding tax is an incredibly unfair and punitive measure.

This should be a lesson to Congress. There is a hidden danger in seeking ways to increase taxpayer compliance without first addressing the real problem: the sheer complexity of our tax code. While measures like the 3-percent withholding provision may be aimed at tax cheats, they end up hurting honest taxpayers in the process. I am committed to working with Rep. Meek and my fellow members of Congress to repeal this measure, so that we can get back to growing our businesses and creating jobs that are the lifeblood of our economy.


About the Author

Congressman Wally Herger (R-CA 2nd) has served twelve terms in the House and is currently on the House Ways and Means Committee.

Congressman Wally Herger (R-CA 2nd) currently serves on the House Committee on Ways and Means, which has jurisdiction over tax policy, trade, Social Security, Medicare, and some federal "safety-net" programs. He was elected to his 12th term in Congress in 2008.

 

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