In Congress, jobs now trump a hunt for tax cheats

AP News
Posted: Oct 26, 2011 4:21 PM
In Congress, jobs now trump a hunt for tax cheats

Congress and President Barack Obama want to scrap a law aimed at pressuring scofflaw government contractors to pay their back taxes, but it's not because the problem has gone away.

On the contrary, government investigators in the past few months have reported that thousands of federal contractors owe hundreds of millions of dollars in overdue taxes, including some who are working for the Internal Revenue Service itself.

The move to repeal the law shows lawmakers' eagerness to show they are trying to protect jobs _ and a national mood of getting government off people's backs. It also underscores the potency of a lobbying campaign to sink the statute by foes ranging from the aerospace industry to female construction company owners.

"We should not have a national policy that assumes every contractor in America is a tax cheat," Rep. James Lankford, R-Okla., said Wednesday as the House debated repealing the law. "It's a dreadful policy and it's horrible economics."

The law requires federal, state and many local governments to withhold 3 percent of what they owe contractors for goods and services until those contractors have fully paid their federal taxes. The requirement, originally scheduled to take effect last January, has been twice delayed and is now due for implementation in January 2013.

The House is expected to vote to scrap the law on Thursday by a one-sided margin, sending the issue to the Senate. Lawmakers still must decide how to pay for the $11 billion over 10 years that repeal is expected to cost in lost revenue.

The measure was enacted in 2006 by a Republican-led Congress and then-President George W. Bush to help pay for tax reductions. It got little attention and was slipped into the tax bill just before final passage.

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

Five years ago, the rationale by one of the chief proponents, Sen. Charles Grassley, R-Iowa, was that tax cheats should not get lucrative government contracts. Part of his concern was over the "tax gap" of unpaid taxes _ a figure the Treasury Department estimated in 2009 reached a huge $290 billion, compared to $2.7 trillion collected that year.

Government reports at the time and since illustrate the problem:

_An April report by Congress' Government Accountability Office found at least 3,700 contractors and grant recipients who were using money from the 2009 economic stimulus act owed an estimated $750 million in unpaid taxes.

_A September 2010 report by Treasury investigators said that 20 contractors for the IRS had tax liabilities of $5.2 million.

_GAO reports in 2004, 2005 and 2006 counted 64,000 civilian and defense contractors with tax debts exceeding $7 billion.

_A 2004 report by the national taxpayer advocate, an independent branch of the IRS, concluded that tax cheating by government contractors is "among the most serious problems facing taxpayers."

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

"Everybody has a duty to pay their fair share of taxes owed," Grassley said in 2006 as the law was approved.

But opposition sprouted almost immediately, with Rep. Wally Herger, R-Calif., introducing repeal legislation and industry groups starting a campaign to scrap the law.

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

"It hasn't gone away," Herger said in an interview this week about the problem of scofflaw government contractors. But he added, "We should not be penalizing the vast majority of law-abiding businesses that are paying their taxes on time."

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, from the U.S. Chamber of Commerce and health care providers to air conditioning contractors and state and local officials. They have flown to Washington, drummed up email campaigns and sent letters to lawmakers complaining of the damage they would suffer.

Influential groups such as the Federation of American Hospitals _ every member of Congress has hospitals in his or her district _ noted that Medicare payments would be among those that would be partially withheld. The Buffalo Supply Co. of Lafayette, Colo., wrote that the withholding would "negatively impact the ability to hire additional workers." Local government officials warned it would drive up their cost and the prices contractors charge.

Government analysts have provided mixed conclusions about the impact withholding would have.

In a report last week, the nonpartisan Congressional Research Service wrote, "Currently, verifiable data does not exist to objectively compare the costs with the benefits of implementing the 3 percent withholding requirement."

But in a preliminary estimate provided to some in Congress this May, the nonpartisan Congressional Budget Office said that 3 percent withholding would cost the federal government $85 million in administrative costs over the next five years with another $12 billion in administrative costs for contractors _ which the budget office said it expected would eventually be passed on to the government in the form of higher prices.

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

Last week, the White House did threaten 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.