3% Government Withholding Tax
Issue
The withholding requirement, added in the Conference Committee of the 2005 Reconciliation bill, without debate or inclusion in either the House or the Senate bills, is a sweeping mandate on federal, state and local governments to withhold 3 percent of payments for goods and services. The Congress saw this tax as one way to close the government's "tax gap" - the difference between the amount due to the Treasury in the form of tax payments and the amount actually received from taxpayers.
The provision, effective in 2011, affects payments for goods and services under government contracts as well as payments to any person for a service or product provided to a government entity. In addition to the burden on business, this new tax is an unfunded mandate on state and local governments, because it does not provide funding for the collection and management of the tax.
MCAA has opposed this withholding tax and has urged Members of Congress to repeal this tax.
Update
The U.S. House of Representatives voted 405-16 on October 27, 2011 to repeal the 3% withholding law on all federal, state and local government contracts.
In a separate vote, the House passed H.R. 2576 by a margin of 262-157. The measure will alter the 2010 health care law to include the nontaxable portion of Social Security benefits in calculating eligibility for government health-care programs, removing some individuals from Medicaid and subsidized coverage. These savings would help offset the loss from 3% withholding repeal.
On November 10, 2011, the U.S. Senate voted 95-0, with one Senator voting "Present," to repeal H.R. 674.
The Senate amended the bill to include tax credits for companies that hire unemployed veterans and mandate a study of tax compliance by federal contractors. The Senate did not consider any amendments contemplated by Senate Majority Leader Harry Reid to continue to apply the withholding to delinquent taxpayers.
The U.S. House of Representatives voted 422-0 on November 16, 2011 to unanimously repeal the 3% withholding law.
President Barack Obama signed the bill into law on November 21, 2011 and it became Public Law 112-056, repealing the 3% withholding requirement once and for all.
Conclusion
The Mason Contractors Association of America has opposed the withholding and has worked hard to urge Congress to repeal this law. The MCAA would like to thank all of the members who called, wrote, and visited their Senators and Representatives to help make this significant legislative victory possible.
Key Points
Supporters of the 3% provision believe the advance tax payments will help close the government's "tax gap" - the difference between the amount due to the Treasury in the form of tax payments and the amount actually received from taxpayers.
The Masonry lndustry is concerned that Congress could potentially make matters worse by either increasing the withholding percentage or accelerating the effective date in order to "pay for" other popular programs in need of funding.
Instead of focusing on the "tax cheats" that are primarily responsible for the tax gap, Congress is using the sledgehammer approach by penalizing honest companies and individuals.
Current government vendors may ultimately decide not to participate in government contracts which would narrow the pool of companies who bid on federal, state and local projects, thereby further increasing construction costs. Furthermore, small businesses may be driven out of the market all together.
Federal construction projects require constmction contractors to carry several types of bonds. Surety companies consider companies cash-flow performance when issuing various bonds. The withholding provision will restrict cash-flow making contracton look less profitable leading to higher costs or the denial of coverage for bonds.
Position
The masonry industry opposed the 3% withholding tax and urged Members of Congress to support bills to repeal this overreaching new requirement. President Barack Obama signed the bill into law on November 21, 2011 and it became Public Law 112-056, repealing the 3% withholding requirement once and for all.
