Congress Repeals 3% Withholding on
Government Contractors

 
After an extended campaign by construction industry groups urging Congress to scrap a provision that would have imposed a withholding requirement on government contractors, President Obama signed into law on November 21, 2011, the 3% Withholding Repeal and Job Creation Act, which eliminates the controversial 3% withholding requirement for government contractors. The bill passed with overwhelming bipartisan support.

The new law repeals the 3% government contractor withholding mandate, a measure designed to discourage tax avoidance among contractors that never went into effect. Under Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), a 3% government withholding requirement was to be imposed on payments of $10,000 or more to contractors and other providers of services or property to Federal, state, and local governments. The government withholding had been scheduled to apply to payments made after December 31, 2010, but the implementation was delayed under the economic stimulus legislation, and again by the Internal Revenue Service (IRS), and had been due to go into effect on January 1, 2013.

Lake Coulson, executive director of government affairs at the National Electrical Contractors Association (NECA), said the repeal of 3% withholding has been on the NECA’s legislative agenda since the measure was first passed. “The entire construction industry came together to fight for repeal of the 3% withholding tax,” Coulson said. “The recession served to draw additional attention to the issue, since having 3% withheld from these companies could have been catastrophic for some companies.”

The Associated General Contractors of America (AGC) had been working to repeal the withholding tax over the past five years, with members from all regions of the country calling and visiting members of Congress to urge them to support its elimination.

The Joint Committee on Taxation has estimated that the repeal of the withholding tax will cost $11.2 billion over 10 years. To offset this cost, the new law alters the definition of modified adjusted gross income (AGI) to include a portion of the individual’s Social Security benefits, which had previously been excluded, when calculating AGI for the purposes of determining eligibility for Medicaid, the Children’s Health Insurance Program, and for the premium assistance tax credit, which will become available as part of the health care reform plan starting in 2014.

In addition, the law will permit the IRS to impose a continuous 100% levy against payment due on a provider of property sold or leased to the Federal government if the vendor has an unpaid Federal tax debt, and not just on vendors of goods and services, as was previously the case. The legislation further provides the VA with the authority to obtain information from the IRS, and orders the Treasury Department to prepare a report on how the government can become more effective in collecting delinquent taxes owed by Federal contractors.

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