Tax Relief
With its 2,000 members, the National Utility Contractors Association (NUCA) unites the underground utility construction industry under its leadership, promoting and defending the interests of its stakeholders. If you’ve been following NUCA’s legislative agenda over the past few years, you know the full and permanent repeal of the government withholding provision from the tax code is a top priority for the association. As an active member of the Government Withholding Relief Coalition (GWRC), NUCA works collectively with more than 100 industry organizations to prevent the withholding provision from being implemented. And the opposition doesn’t end with industry groups that represent government contractors. Federal, state and local government organizations themselves have lined up against the provision, complaining of the administrative nightmares that will accompany its implementation. Even the Internal Revenue Service (IRS) is rumored to strongly oppose the withholding in “off the record” conversations. In fact, the tax agency is responsible for the latest year-long delay in implementation of the withholding provision.
Government Policy at Its Worst
Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 requires federal, state and local governments to withhold 3 percent from all payments for goods and services made to businesses that work for government agencies. The alleged intent of the provision was to ensure that government contractors pay their taxes and to address the “tax gap” or the difference between what the IRS believes is owed and what actually is collected each year. The truth is this was nothing more than “fishing for dollars” under the veil of efforts to ensure tax compliance on the part of some in Congress at the 11th hour of a drawn-out tax debate.
This overreaching provision was short-sighted enough that when the bill was enacted in 2006, Congress almost immediately delayed implementation of the withholding provision for five years. In 2011, the American Recovery and Reinvestment Act of 2009 (ARRA), otherwise known as the “economic stimulus bill,” delayed the effective date until Jan. 1, 2012. Earlier this year, the IRS, which is in the process of transitioning the act into tax law, again delayed implementation until the beginning of 2013.
The new delay immediately inspired a loud outcry from organizations representing government contractors, which have repeatedly called for its repeal and detailed how it would harm small businesses, causing devastating cash flow problems. The GWRC commonly points to multiple legislative and regulatory measures put in place since the law was passed to increase tax compliance, including requirements for contracting officers and grant officials to verify compliance with tax laws and requirements for contractors to certify that they are not delinquent in paying their taxes.
Impacts on Small Businesses
The inclusion of the 3 percent withholding measure in federal legislation can be blamed in part on the lack of business savvy of some in Congress. We have heard remarks such as “3 percent is not that much” during some GWRC visits. These folks fail to understand that many small-business contractors work for less than a 3 percent profit margin, and that the withholding could force some businesses out of the public market — or out of business entirely. This will result in obvious job losses, reduced competition and higher costs to taxpayers. Hits to cash flow will force many contractors to wait until the end of the year, or longer, to recoup expenses. This will only reduce profit margins and lessen government contractors’ ability to pay subcontractors and buy materials during a project. In some cases, contractors may be forced to find alternative financing to complete work on an existing contract. For contractors lucky enough to have future jobs on the horizon in this economic environment, the withholding more than obstructs effective planning for the future.
Perspectives from Government
During a recent hearing of the House Small Business Committee to examine the effect of the withholding on the small business community, several committee members called for repeal of the withholding provision. “Instead of rewarding those small businesses that choose to compete for and win contracts, the government essentially pre-accuses them of cheating on their taxes and withholds 3 percent of all payments,” said Rep. Mick Mulvaney, (R-S.C.), chairman of the Small Business Subcommittee on Contracting and Workforce. “This is flat-out wrong and this burdensome requirement should be repealed.”
Industry representatives agreed. A witness testifying at the hearing on behalf of the GWRC claimed the “3 percent withholding would essentially be a loan to the government for the year until our taxes are filed. Worse still, it might require our company to secure a loan to help us cover operating expenses at a time when cash in the bank is limited. The withholding could limit our ability to make payroll each month and limit our use of our profits to give bonuses to our employees, expand our business and hire new employees.”
Compliance with the provision is estimated to cost the Department of Defense (DOD) more than $17 billion for the first five years, according to a DOD study. Looking at comprehensive, government-wide impacts, the withholding is only expected to generate $6.9 billion in federal revenue over the same period. In other words, this provision costs one federal agency more than it saves the entire government, not including the costs to states and local governments.
State governments, already facing serious budget challenges, have suggested that their vendors may increase their prices to governmental entities to compensate for the withholding in order to minimize losses in revenue. As always, these cost increases will ultimately be passed on to American taxpayers.
The Obama administration has stayed away from the debate to the extent possible. However, the White House supports the most recent delay, if only because it felt agencies needed more time to prepare. At the same time, legislation to repeal the withholding provision has been introduced in the House and Senate. Sens. Scott Brown (R-Mass.) and David Vitter (R-La.) introduced separate bills in the Senate, while Rep. Wally Herger (D-Calif.), who has championed repeal efforts since the provision’s enactment, sponsored a companion bill in the House. This bipartisan support, backed up by scores of industry groups, bodes well for supporters of repeal.
Repeal Needed Now
During Capitol Hill visits on the withholding issue, the GWRC heard some arguments in opposition to repeal of the government withholding provision. With the current mantra about the need to cut government spending and reduce the federal deficit, the need for an “offset” to make up for the lost tax revenue has been brought up several times. This, along with reports like one recently released by the Government Accountability Office pointing to $757 million in unpaid taxes from contracts and grant recipients of stimulus funds, only hampers repeal efforts.
Implementation of the government withholding provision will only add additional and unnecessary burdens on small businesses at the worst possible time, and the continued delays in implementation aren’t providing much relief because they remove the confidence small businesses need to hire, purchase equipment and make other investments. These delays also take the urgency out of the situation, which cripples lobbying efforts to make full repeal happen as soon as possible. Lawmakers need to feel the heat from small business organizations, which is why this issue remains a front-burner issue for NUCA and the many organizations of the GWRC.
Eben Wyman is the NUCA vice president of government relations, based in Washington, D.C. Beside utility contractors, NUCA now also represents excavation contractors. Find more information at www.nuca.com.
