Repeal of 3 Percent Withholding Requirement

IMGXYZ1623IMGZYXIt doesn't take a psychic to foresee that January 1, 2011, could be a dark day for contractors; that’s when the federal estate tax is scheduled to come roaring back in full force. It’s also when Section 511 of the Tax Increase Prevention and Reconciliation Act of 2006 is set to take effect. Section 511 would require a 3 percent withholding from any business having a contract with any government agency—federal, state or local—with an annual procurement budget of $100 million or more. It includes contractors and even suppliers.

The National Electrical Contractors Association (NECA) was among the leaders in pressing for estate tax repeal, which passed the House but failed by three votes in the Senate when the Democrats filibustered the measure. Given the makeup of the incoming Congress, estate tax repeal will not be a top priority. However, the repeal of Section 511 is “winnable” in the 110th Congress—if we make the senators and representatives aware of the problem. NECA has already led the charge in that process. In mid-December, an attempt was made to move up the effective date of the withholding law from January 2011 to January 2007. NECA was the first organization to get out the word for contractors and chapters to e-mail and telephone their members of Congress opposing this proposal.

We also joined with the U.S. Chamber of Commerce and the Associated General Contractors to swiftly deliver a joint letter to each member of Congress opposing this wrong-headed action. We were successful in halting the change in effective date, and all this action took place in the space of a few hours on a Friday afternoon.

We can be equally successful in obtaining repeal of the entire 3 percent withholding concept if our chapters and members make their members of Congress aware of just how horrendous this withholding law really is, and we have already begun doing so. Awareness of the consequences of the withholding law needs to spread on Capitol Hill.

The provisions would hurt multitudes of honest taxpaying businesses by forcing them to provide the federal government with a long-term interest-free loan. It would significantly affect company cash flow, especially in construction where pre-tax profit margins rarely meet or exceed 3 percent and where contractors often face an additional 10 percent withholding on progress payments. Costs to state and local governments to oversee the withholding would also be substantial.

NECA was among the first to uncover this provision and to begin working actively for its repeal. Our December defeat of the effort to advance its effective date shows that our education program is well underway. In that battle, we chalked up a strong opening victory in the campaign for repeal.

NECA has assumed a leadership role in that effort to repeal Section 511. Most of the rest of the construction industry and many other businesses and trade organizations have joined us in the fight. Even state and local governments, who would have to pay dearly for administering this measure, are working with us. It’s at the top of NECA’s legislative agenda this year. I urge you to make it a top priority, as well.