3% Withholding
What is 3% Witholding?
Recent Events
Documents
Letters to Representatives Urging Support for Repeal
Letters of Support from Outside Associations
Media Stories on 3% Withholding
What is 3% withholding?In 2006, in a late night closed-door meeting, several members of the U.S. Senate, over the objections of House negotiators, included a little noticed provision in a larger tax bill that, if not repealed, will increase the cost of doing business for many companies and governments. This is an alarming example of why transparency in the legislative process is so important.
Specifically, in January 2011, governments at all levels will be required to withhold 3% of any payment to an outside vendor for goods or services. This will be forwarded to the IRS as a kind of pre-payment on taxes. Although the provision does not take effect for several years, it is important to begin our work for full repeal now. This is why I've joined with Representative Kendrick Meek of Florida to introduce bipartisan repeal legislation.
Why did Congress create this new law?
The overwhelming majority of taxpayers pay their taxes in-full and on-time. However, some taxpayers do not. Congress instituted the new 3% withholding provision as a way to force tax cheats to pay their fair share. It does this by requiring that everyone doing business with a government or governmental agency pay 3% up front.
The concern was that some businesses that provide goods and services to governments were cheating on their taxes and getting away scot-free. Unfortunately, 3% withholding casts an unreasonably wide net, and targets not only probable tax cheats, but all businesses that work with governments. We should not let tax cheats off the hook, but there are better ways to hold these individuals accountable without harming innocent taxpayers.
Statistics show that the number one reason for late or incorrect tax payments is mistakes. In other words, individuals and businesses have trouble understanding the hundreds of thousands of pages of tax laws and millions of words in the tax code. The most obvious way to address the problems stemming from an overly complicated tax code is to seek tax simplification. But instead of addressing the complexity that results in mistakes and underpayments, Congress chose to make paying taxes even more complicated and burdensome.
I strongly disagree with this approach. There are other ways to force tax cheats to pay their fair share without making the system more complicated and burdensome for everyone. For this reason I have co-authored legislation to repeal the 3% withholding burden before it takes effect.
Who does 3% withholding affect?
If you're a small business owner, contractor, or supplier and you provide any kind of service or product to the federal, state or a local government, you will be affected if the law is not repealed. If you're a farmer who receives a commodity payment, you will be affected. If you run a for-profit hospital or are a physician and receive reimbursements from Medicare for services, you will be affected.
In each case, these individuals and businesses will only receive $0.97 on every dollar they're owed in payment. The other 3 cents will be forwarded directly to the IRS. The only two exceptions are that 1) governments with expenditures under $100 million do not apply, and 2) non-profit organizations do not apply.
Unfortunately, in many cases, withholding 3% of a company's revenues will add up to a lot more than what the company eventually owes in taxes. This means that the federal government is depriving such companies of much needed cash flow that would otherwise be used to make payroll for employees, pay subcontractors, or purchase supplies. While the company waits over the course of the tax year for its eventual refund, it does not have this cash on hand, and may turn to alternate means of financing daily operations or even increase prices to final customers, i.e., the governments themselves. To the extent these costs of doing business are passed along in the form of higher prices, all taxpayers end up footing the bill.
This is only the beginning.
As the new Democratic majority in Congress looks to fund additional government spending without raising taxes, it will likely continue to turn to measures like the 3% withholding provision. These so-called "tax compliance" measures are a sneaky way of raising tax revenues without actually raising taxes. But I believe this approach is flawed. Without first simplifying the tax code, increased compliance will continue to mean increased intrusion of government into the lives of Americans.
Our legislation has been gaining steam in Congress and already has over 170 cosponsors. Kendrick Meek and I recently held a press conference at the U.S. Capitol with grassroots leaders to rally support for the bill. Working together I am hopeful we will be able to fix this law before it begins to affect governments and businesses in 2011.
October 2007
- H.R. 1023 Surpasses Half-House Mark - Thanks to the great support of a broad coalition, more than half of all members of the House of Representatives have cosponsored H.R. 1023, the Government Withholding Tax Relief Act. View list of cosponsors
- House Considers Bill with 3% Withholding Related Provision - The House considered a measure, H.R. 3056 on October 10 that included a one-year delay of the 3% withholding burden implementation. I opposed this measure because it unnecessarily paired the 3% withholding delay to a highly controversial elimination of a successful IRS program to collect otherwise uncollected tax debts.
- Click here to view my floor remarks or read a transcript. Despite today's legislation, there is much action to be taken in the House and Senate to fully repeal this onerous burden before it is enacted.
- The Chamber of Commerce, the Associated Builders and Contractors, and the Associated General Contractors wrote letters supporting the consideration of a 3% withholding repeal alone and on its own merits.
September 2007
The National Electrical Contractors Association (NECA) recently awarded Representatives Wally Herger and Kendrick Meek its 2007 Political Leadership Award for their bipartisan work to repeal the 3% withholding burden. View Herger's brief remarks
Letters to Representatives Urging Support for Repeal:
Letters of Support from Outside Associations:
- Government Withholding Relief Coalition
- Chamber of Commerce
- American Farm Bureau Federation
- American Council of Engineering Companies
Media Stories on 3% Withholding:
