The House Ways and Means Committee today by voice vote favorably reported out of committee, H.R.674, a bill to amend the Internal Revenue Code of 1986 to repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities. This will serve to provide withholding relief to contractors and other recipients of government payments.
Following the vote Ways and Means Committee Chair Dave Camp (R-MI) told reporters that he had not yet discussed the 3 percent withholding bill with Senate Finance Committee Chair Max Baucus (D-MT), and so far had no assurances from the Senate that it would bring the bill to the floor. “We thought we would get it through the committee first and then get a good resounding vote which we did get. It shows that there is a lot of support for repealing that,” said Camp. When asked if the plan was to pair the two bills on the floor, Camp said that he didn’t know. He said he would be talking to Senate Majority Leader Eric Cantor (R-VA) about timing on House floor consideration of the measures.
This provision first appeared in the Tax Reconciliation Act of 2005 as a last-minute addition designed to create advance revenues to the Treasury. The stated justification was improving compliance in an industry that was apparently considered at risk for abuse. Several factors have been cited as problematic including:
- Low margins with construction contractors and engineering firms could place them at significant risk of cash flow problems or insolvency if withholding is taken during the initial phases in a project when outflows are greater.
- The cost of implementation and compliance for governments, in terms of software and other changes could potentially outweigh revenue gains realized in two particular areas: 1) capital investments to modify financial systems, and 2) annual recurring costs for additional employees.
- Collateral damage – Medicare, Fram and some grants were included as well, yet the medical industry in general has not been described as at risk.
- Private companies would be forced to hike debt levels or lines of credit in a tightening credit environment (during a time of shrinking margins due to national economic factors).
President Obama had previously included a provision in his American Jobs Act of 2011 that would delay implementation until 2014 but did not repeal the provision.
For more information on the AICPA position on this, go to: http://www.accountingtoday.com/news/AICPA-Congress-Repeal-Herger-Withholding-Law-60428-1.html