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House measure would repeal rule to withhold contract payments

Oct. 27, 2011 - 04:03PM   |  
By SARAH CHACKO   |   Comments
The Caldecott Tunnel construction project is seen in August in Oakland, Calif. A House measure would remove language from the Internal Revenue Code that reqires agencies to withhold 3 percent of payments on contracts worth more than $10,000 in 2013.
The Caldecott Tunnel construction project is seen in August in Oakland, Calif. A House measure would remove language from the Internal Revenue Code that reqires agencies to withhold 3 percent of payments on contracts worth more than $10,000 in 2013. (Justin Sullivan / Getty Images)

Legislation to repeal a pending rule that would withhold 3 percent of government payments to contractors passed the House Thursday.

House Resolution 674, which passed 405-16, would remove language in the Internal Revenue Code that in 2013 requires agencies to withhold 3 percent of payments on contracts worth more than $10,000. The http://thomas.loc.gov/cgi-bin/bdquery/z?d112:H.R.674:">code also restricts payments to grant recipients at for-profit companies, and to farm and Medicare recipients. The intent is to reduce payments to people and companies with tax debts.

Repealing the 3 percent withholding is a part of House Republicans' job creation plan that has the support of business associations, including the Chamber of Commerce, National Association of Manufacturers, and National Federation of Independent Businesses. They say the IRS provision hurts job creation because it restricts cash flow to contractors.

The Associated General Contractors of America released a http://news.agc.org/2011/10/21/3-tax-withholding-measure-will-decrease-construction-employment-punish-employers-and-hurt-taxpayers/">survey of 1,300 construction firms last week showing that 63 percent of firms reported that their average profit margin for public projects is less than 3 percent. Forty-nine percent of firms said the withholding measure could force them to decrease their hiring plans, and 67 percent said the measure would force them to raise their bid levels.

"Coming from a small business background, I can attest that businesses look several years ahead when they're deciding how to invest," HR 674 sponsor Rep. Wally Herger, R-Calif., said during discussion of the bill on the House floor. "Now is the time to eliminate the barriers that are standing in the way of jobs for American workers."

State and local government organizations, as well as the Defense Department, have also voiced concern about the costs to implement the withholding provision.

In 2008, the Defense Department estimated that the provision would cost the Pentagon more than $17 billion in the first five years, including implementation costs and expected escalating costs from contractors.

The IRS announced in May that it would delay enactment of the withholding rule until 2013. The agency said it had received comments expressing concern about the effect of the rules, and said it wants to alleviate the administrative burden on agencies and companies whose payments would be withheld.

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