Washington, D.C. (Press Release – October 27, 2011) – The Small Business & Entrepreneurship Council (SBE Council) cheered U.S. House passage of H.R. 674, legislation to repeal the onerous and costly 3 percent withholding tax on government contractors. Earlier this week, the White House issued a statement of administration policy in support of repealing this nonsensical mandate.
“Repealing the 3 percent withholding tax makes economic and fiscal sense. With the cost of this mandate far exceeding anticipated revenue gains, and small firms becoming less able to compete for government contracts due to cost and cash flow constraints, repealing the withholding tax will produce many winners. Taxpayers, small businesses and state and local governments all benefit from repeal,” said SBE Council President & CEO Karen Kerrigan.
According to SBE Council, small contractors would be squeezed by the mandate as it requires government to retain 3 percent of each payment made to contractors for the goods or services they provide. Federal, state and local government all must comply with the mandate. As noted by the Administration’s statement of policy: “The effect of the repeal of the withholding requirement would be to avoid a decrease in cash flow to these contractors, which would allow them to retain these funds and use them to create jobs and pay suppliers.”
The 3 percent withholding tax was originally conceived as a strategy for closing the “tax gap.” It was enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) as section 3402(t) of the Internal Revenue Code, and mandated that federal, state, and local governments withhold 3 percent of nearly all of their contract payments, Medicare payments, farm payments, and certain grants. The withholding requirement’s start date has been extended several times, and is scheduled to take effect January 1, 2013.
SBE Council has long advocated for repeal of the mandate. Last week, the U.S. Senate voted on a repeal measure that did not receive the 60 votes required for cloture (57-43), but the strong bipartisan support signals an opportunity for eventually passage in the chamber.
“Small business owners want certainty. Repeal of the 3 percent withholding tax is one of many measures that can help produce stability and business confidence. We are currently in a period where we believe the White House and Republicans in Congress are finding common ground areas to help small business and the economy. Our efforts are focused on showing them where these areas exist on a number of tax, regulatory and health care priorities for small business,” added Kerrigan.
SBE Council is a nationwide small business advocacy, research and networking organization dedicated to protecting small business and promoting entrepreneurship. For more information, please visit: www.sbecouncil.org.