Efforts Continue to Repeal 3% Withholding Requirement as Deadline Nears

A coalition of 124 national, state, and local organizations continues to urge Congress to repeal a 2005 law that would require all levels of government to withhold 3% from most payments for products or services, starting January 1, 2012.

Original Intent: The law, which would apply to federal, state, and local governments with expenditures of $100 million or more, was designed to combat tax evasion. Proponents point out that retaining 3% of payments against vendors' tax liability is projected by the government to raise nearly $7 billion between 2011 and 2015 through improved taxpayer compliance.

Hidden Costs: Critics, however, contend that the new rule could incur a number of hidden costs:

• Cash flow: Companies, especially smaller ones, that rely on full, prompt payments for day-to-day expenses would be faced with making up the 3% reduction through price increases or costly financing.

• Up-front investment to modify systems:  Public agencies would need to invest in updates to their financial systems to track withholding and comply with reporting requirements.

• Administrative costs:  Agencies would also need to cover the cost of administering the withholding requirement.

• Increased project costs: Bid prices may rise from companies raising their prices to cover additional costs, or from decreased competition as fewer firms bid on government jobs.

Repeal Efforts: A number of bills have been introduced to the House and Senate in the past few years in an attempt to repeal "Section 511" (the original measure was contained in Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005). While none have yet been successful (a few introduced this year are still in committee), the industry did gain a small victory in early 2009 when the date of implementation was postponed a year from the first of January 2011 to 2012.

More Information:

• The Government Withholding Relief Coalition is spearheading industry efforts to repeal the withholding law, and maintains links to a number of resources
  • A one-page summary of the law (PDF) by the Government Withholding Relief Coalition
• The (one-page) text of the original law (PDF)
• A recent GovPro article covering the new law and efforts to repeal it
• My previous blog post on the law and its implications

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