The End for 3 Percent Withholding

At a time when it seems lawmakers couldn’t agree on the weather, never mind what it would take to fix the ailing economy, there is at least one important issue they can rally around. Unpopular from its conception, the federal 3 percent withholding rule for government contractors is the focus of their unified opposition. As of Nov. 21, it has been repealed.

H.R. 674, sponsored by Congressmen Wally Herger (R-Calif.) and Earl Blumenauer (D-Colo.), which will repeal the withholding requirement, enjoyed strong bipartisan support. The House passed the measure by a vote of 405–16. The Senate approved a modified version of the bill unanimously, by a vote of 95–0, a week later on Nov. 10. However, with changes to the legislation made while at the Senate level, the bill returned to the House where it passed unanimously. That a piece of legislation could get such a lopsided vote from lawmakers whose divisiveness is at historic levels is a testament to how unpopular the provision has been.

With the House of Representatives and the Senate in agreement, President Barack Obama received and signed into law the bill that repeals the withholding requirement on Nov. 21, putting to rest the long-delayed and unpopular legislation.

“The withholding tax was an ill conceived measure designed to address tax compliance,” said Lake Coulson, National Electrical Contractors Association executive director of Government Affairs.

Though adopted in 2006, the advanced withholding had been scheduled for implementation but had been delayed in both the president’s recovery and stimulus act and through regulation until 2013. The provision would have required federal, state and local governments to withhold 3 percent of all payments for goods and services to contractors as an advance on taxes.

Opponents of the measure argued that it was unfair and burdensome to place the advanced withholding on all contractors, rather than target action to collect from the few bad apples who don’t pay taxes yet continue to secure government contracts.

Even the costs to administer the requirement could not justify its collections. The Department of Defense reported to Congress that it would spend $17 billion to administer the withholding requirement. In contrast, the Joint Committee on Taxation projected that the entire federal government would forgo $11.2 billion with the provision’s repeal.

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