Congressional Support Grows for Repeal of 3% Withholding Requirement

We have written earlier concerning our opposition to this new withholding requirement.  Enacted into law in 2006, this provision requires all federal, state and local government entities and instrumentalities to withhold three percent of payments made for goods and services.  Initially set to go into effect in 2010, legislative extensions had pushed the effective date to January 1, 2012.  And by regulation, the IRS further extended the enforcement to January 1, 2013.

It seems pretty clear that no one really wants this provision to go into effect, however, Congress is finding it difficult to replace the $7 billion in revenue it’s scored to generate over 10 years.  In reality, the compliance cost to the Department of Defense alone, which would need to revamp its contracting procedures, is estimated at $17 billion!  So, repeal of this provision would actually save DoD alone $10 billion.  Clearly, the savings would increase when you add in all the other local, state and federal government entities that will be required to withhold.

In written testimony and blogs, we have repeatedly called for repeal of this provision, which just adds another unnecessary compliance burden on both government payers and their small business contractors.  Currently, there are three active pieces of legislation that would repeal this provision, H.R. 674, S. 89 and S. 164.

Support for H.R. 674 in the House is growing, and this legislation now shows 208 co-sponsors, although at least one congressman has come onboard in the last couple of days.   S. 89 has 11 co-sponsors in the Senate, while S. 164 (which in addition to repeal, included an unrelated provision to rescind $39 billion of appropriated but unobligated discretionary funds)
has 20 co-sponsors.

Where this legislation goes from here is uncertain.  Most likely, it will be pegged onto a tax bill, and it’s not out of the question that it could move as part of the “anticipated” budget agreement.  But, it does seem clear that there is wide support for repeal of this short-sighted provision.  Things like this happen when legislation is not properly vetted, and this provision was not.