Push starts to stay contractors' tax-withholding provision

Although it does not take effect until 2011, opponents of a law requiring government agencies to withhold 3 percent of payments to private contractors and service providers are looking for a legislative vehicle to keep it at bay a while longer.

A bill introduced early last year by Reps. Kendrick Meek, D-Fla., and Wally Herger, R-Calif., to repeal the requirement has 255 House co-sponsors, while a huge coalition representing nearly every industry that provides government services has formed to oppose the requirement.

But pay/go rules have stymied any attempts to delay it. Still, Meek and Herger prevailed on the Ways and Means Committee leadership to include a one-year delay in a larger House-passed tax bill that stalled in the Senate.

A one-year delay costs $316 million, but Meek hopes it will be attached to a moving vehicle.

"It's still alive as a temporary delay. I don't know that we're going to be able to move it lock, stock, and barrel because of the cost," Meek said recently. "But the signal to leadership in both the House and Senate is clear that it is an inappropriate burden on local governments and small businesses. I've received absolutely no push-back from the Democratic leadership." Herger said some businesses do not even make a 3 percent profit, let alone have to forfeit 3 percent up front to the government.

That a delay of the provision, enacted to help offset part of the 2006 tax law that extended lower rates on capital gains and dividends, among other provisions, is even in play is an achievement. In the pay/go environment, critics assumed Democrats would move up the start date of the withholding requirement to offset the cost of new initiatives. The requirement's champion is a Republican, Senate Finance Committee ranking member Charles Grassley, R-Iowa.

Long a critic of abuses in federal contracting, Grassley inserted the provision in the waning days of conference negotiations on the $69 billion, 2006 tax-cut bill. To comply with budget reconciliation procedures, Grassley and GOP leaders had to find about $20 billion in offsets to make it fit within its cost limit. The biggest single revenue-raiser, at $7 billion, turned out to be the 3 percent withholding requirement, which Grassley argues will help narrow the "tax gap" between what is owed and paid. His spokeswoman noted a GAO report in June that found about 6 percent of Medicare providers in 2006 owed the government more than $2 billion in unpaid taxes. "Sen. Grassley will consider comments from people who want a delay, but there's clearly a long-demonstrated need for reform in this area," she said.

Herger, a senior Republican on Ways and Means, said he never agreed with the provision. "It's always easier to raise taxes, and it's even easier to raise them manana," he said. "If it's not good policy, it's not good policy; it doesn't matter if a Republican recommended it or a Democrat. We all have our good days and have our bad days. That was a bad day."