Repeal the Contractor Withholding Requirement Today!

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In May of 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act (TIPRA) (Public Law No. 109-222). The measure was a combination of small tax provisions, including extension of capital gains tax rates, increased expensing provisions for small businesses and some alternative minimum tax relief. To offset these revenue-negative provisions it also contained sixteen "revenue offset" provisions to make the bill revenue neutral.

While most of the provisions of the bill were debated in both the House and Senate, there was a provision that emerged from the conference committee that had never been part of the original bills and never discussed in hearings on the chamber floors. Section 511 mandates that federal, state, and local governments withhold 3 percent of their payments for goods and services (the "government withholding regime"). Assumptions are that it was added into the bill to help reconcile the bill and make it "revenue neutral."

The law imposes significant burdens contractors and subcontractors, as well as federal, state and local entities. This law will create additional paperwork burdens and compliance costs for contractors, ultimately reducing competitiveness and driving small businesses out of the contracting marketplace. The reality is that larger, well-capitalized firms are in a better position to absorb the added financing costs, whereas smaller firms do not have the resources necessary to absorb the added 3 percent float in their bids/price proposals.

Section 511 has the net effect of forcing government contractors to make interest free loans to the federal government for amounts that in some cases will exceed contractors' profit margins. This provision will impact cash flow and reduce the amount of money available for payroll, new business investment, and everyday expenses. As small business struggle to mitigate the impact of this provision, many will take on additional debt, while others forced out of the marketplace.

Perhaps more concerning, is that this law unnecessarily penalizes law-abiding businesses for non-compliant businesses. Proponents of this law argue that this provision will ensure that contractors and subcontractors will satisfy tax liabilities. However, NAGC believes that enforcement of current laws would ensure that tax obligations are met. Existing laws require all corporations to make estimated tax payments towards their income tax liabilities quarterly. The government already has the ability to enforce tax policies and simply fails to do so. However, the government already has the information it needs to address this problem without putting the burden on small businesses and driving some small businesses out of the market. Consequently, businesses that have fulfilled their tax obligations are being penalized through the procurement process.

Finally, many state and local governments believe this is an unfunded mandate that will increase the costs of administering contracts. The result will be less funding available for projects and services, effectively reducing government contract awards.