House to repeal law withholding contractors' taxes

AP News
Posted: Oct 26, 2011 3:11 AM
House to repeal law withholding contractors' taxes

Against a backdrop of thousands of government contractors underpaying their taxes by billions of dollars, Congress decided in 2006 to start withholding 3 percent of the contracted price until taxes owed are paid. It never happened.

Five years later, both parties and President Barack Obama want that law repealed in the name of jobs _ despite hundreds of millions in taxes still going unpaid by scofflaw government contractors.

The provision signed into law five years ago was part of a tax-cutting bill approved by a Republican-run Congress and signed into law by then-President George W. Bush in 2006. The $11 billion it was to raise over the next decade was supposed to help pay for those tax reductions.

Today's turnabout comes despite agreement on all sides that problems with scofflaw government contractors continue. Recent evidence includes an April report by investigators finding $750 million in overdue taxes owed by contractors under President Barack Obama's economic stimulus law, and another from September 2010 citing tax cheats among 20 companies working for the Internal Revenue Service itself.

The law requires federal, state and local governments to withhold 3 percent of their payments to contractors to encourage the full paying of taxes. Its implementation has been delayed twice and it is now scheduled to take effect in January 2013.

Repeal supporters say the original measure went way too far, imposing administrative burdens on governments of all sizes and penalizing virtually all government contractors, most of whom fully pay their taxes on time. Some companies with small profit margins could be wiped out, they say.

Even so, the reversal underscores the desire of lawmakers in today's battered economy to show they're trying to create jobs, and the power of an effective and virtually unopposed lobbying campaign run by participants who read like a who's who of Washington's interest groups.

"We have to enforce our tax laws, but we have to enforce them fairly," said Rep. Wally Herger, R-Calif., a chief sponsor of the repeal bill. "If we have tax laws being enforced in a way to deter our economy and detrimental to small business and detrimental in general, those need to be reversed."

Obama is among those backing repeal, including the bill the House is expected to approve Thursday. The White House has written in recent letters to Congress that letting contractors keep the 3 percent "would allow them to retain these funds and use them to create jobs and pay suppliers."

But last week, the White House threatened to veto a Senate version of the repeal bill introduced by Minority Leader Mitch McConnell, R-Ky., citing opposition to McConnell's proposal to pay for the measure by cutting domestic programs. Ten Democrats joined Republicans in voting 57-43 to consider the bill anyway, falling three votes short of the 60 they needed to begin debate.

Republicans used Obama's veto threat to accuse him of standing in the way of a common-sense measure.

"We're hopeful the president will join us," House Majority Leader Eric Cantor said Tuesday. "There's no reason that this bill shouldn't pass."

The repeal provision was originally enacted amid concerns about the so-called tax gap _ the amount of taxes the federal government believes go unpaid. In 2009, the Treasury Department said the IRS collected $2.7 trillion in taxes the previous year but $290 billion was unpaid.

Collecting some of that money would put a sizable dent in the $1.2 trillion over 10 years in budget savings that Congress' bipartisan, debt-cutting supercommittee is trying to identify by Thanksgiving.

Investigations in recent years have documented tax violators among government contractors, including:

_A March 2006 report by Congress' Government Accountability Office that more than 3,800 civilian contractors with the government's General Services Administration _ about 10 percent of the total _ had $1.4 billion in tax debts in 2005.

_A June 2005 GAO report saying 33,000 civilian agency contractors owed more than $3 billion in 2004.

_A GAO report in February 2004 saying more than 27,000 defense contractors owed $3 billion in unpaid taxes in 2002.

Overall, the government spent $535 billion on contracts last year, according to the White House Office of Management and Budget.

When the repeal language became law, Congress never voted on it separately. It was included in the final 2006 tax-cutting bill by senators including then-Senate Finance Committee Chairman Charles Grassley, R-Iowa.

"Those who are paid by the government should be held to a high degree of responsibility to pay taxes that are legally due," he said then.

Why did it make it into law so easily? Lawmakers now say things happened so fast that it was never fully studied.

"Nobody really fully understood what had been stuffed into" the bill, said Rep. Earl Blumenauer, D-Ore., a co-sponsor of the repeal effort. He says he soon began hearing from Oregon businesses, which convinced him "this was going to be grotesquely complicated and just expensive."

Opposition to withholding sprung up as soon as it became law, with Herger introducing repeal legislation and industry opposition arising almost immediately.

By 2008, the Pentagon had written Congress that it would cost the military $17 billion to comply with the withholding requirement over five years, including higher prices it expected contractors to charge as a result of the change. It warned of paring the number of companies willing to do business with the government and of "unintended consequences."

A coalition of groups favoring repeal has grown to more than 140 members, ranging from the U.S. Chamber of Commerce and health care providers to air conditioning contractors and state and local officials. They have flown members to Washington, drummed up email campaigns and sent letters to lawmakers complaining of the damage they would suffer.