Agencies, companies wait in limbo about tax repeal

Officials throughout the government—including state and local governments—and contracting companies are having to spend money to modify their systems for a law that might be repealed before it takes effect.

The potential repeal of a 3 percent withholding tax on contractors, even though it had never been implemented, has left government officials and contractors  in limbo as Congress and administration officials attempt to find places to offset the lost revenue.

Officials throughout the government—including state and local governments—and contracting companies are having to move ahead with efforts to modify their systems to factor in the tax, even though experts say the political will is there to repeal it, said Trey Hodgkins, senior vice president for national security and procurement policy at TechAmerica.


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The repeal of a payment withholding tax has a growing consensus of support in Congress, but ending the tax hinges on offsetting the lost revenue.

Senate Minority Leader Mitch McConnell (R-Ky.) could not gather together 60 senators on Oct. 20 to bring to a vote his Withholding Tax Relief Act (S. 1726). The tax was enacted in 2006, but officials have continually delayed its enforcement. Currently, the tax is set to go into effect in 2013.

It’s a tax that both Democrats and Republicans say would hinder economic growth, particularly among small businesses.

McConnell’s bill  offset an estimated $11.2 billion in revenue over 10 years with $30 billion in cuts to unspent money. Democrats didn’t like that approach. Senate Majority Leader Harry Reid (D-Nev.) urged senators to oppose McConnell’s bill because he has an alternative plan with funding offsets.

On Oct. 20, the Office of Management and Budget's statement of administration policy said the McConnell legislation’s offsetting cuts would be a major mistake.

“The bill’s unspecified rescission of $30 billion in appropriated funds would cause serious disruption in a range of services supported by the federal government,” OMB officials wrote. OMB warned of a possible veto based on the offsets.

The repeal is coming to the floor of the House for a vote on Oct. 27. The House bill to repeal the withholding tax has bipartisan support with more than 200 members backing it. However that bill (H.R. 674) doesn’t include offsets to the lost revenue.

Hodgkins said a bill the House  Ways and Means Committee approved that enacts reforms to health care programs could be a way to offset the cost of repealing the withholding tax, even though that the two bills have not yet been formally connected.

Without the right offsets in the House bill, the administration likely will raise the same objections as it did with McConnell’s bill, according to Alan Chvotkin, executive vice president and counsel for the Professional Services Council.

“There is significant political will to repeal this,” Hodgkins said.

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