Don't celebrate withholding tax repeal just yet

Congress and the president ended the system of withholding 3 percent of payments to contractors in 2011, but one expert says something else may take its place this year.

President Barack Obama signed the 3% Withholding Repeal and Job Creation Act into law Nov. 21, after it moved through Congress with ease. The legislation amended the tax law to cancel the withholding requirement on payments due to vendors providing goods and services to federal, state, and local government agencies.

The withholding system may be gone, but David Gallacher, associate at the Sheppard Mullin law firm, wrote in a Jan. 11 blog post that government and industry should watch for something just as “dysfunctional” that could take its place.

The bill requires the Treasury Department and the Office of Management and Budget to study ways to reduce the amount of federal taxes owed but not paid by contractors. For the study, officials must figure an estimated amount of delinquent taxes and whether having companies certify in bid proposals that their taxes are up to date has helped in compliance. Officials also will have to delve into various aspects of contracts awarded to tax-delinquent companies. The study doesn't apply to grantees.

The study is due this coming November.

Larry Allen, president of the Allen Federal Business Partners, said the possibility is real. The question is whether there's a way for the government to recover tax money before paying contractors, or only after.

"Clearly, both federal agencies and industry believed that a pre-payment withholding program was unworkable and more expensive than it was worth," he said.

As officials look for other possible options, Allen said there's no need or reason to make everyone pay because of a few problem contractors.

"Today we have smart munitions that can take out a mailbox while leaving everything else intact. Can't we do the same here?" he said.

The government is in a budget crunch and is seeking pools of resources to fund its operations. Under such scrutiny and in need, Gallacher predicts Congress will come up with other ways to get more money from contractors. He warned of broad approaches to get at delinquent tax dollars.

“Do not be surprised if Treasury identifies a number of solutions that are as overly broad and dysfunctional as the 3-percent withhold,” he wrote.

Congress passed the legislation by overwhelming majorities in both chambers, after hundreds of industry groups had attempted to change minds for five years.

But the lawmakers have not really adjusted their stance, Gallacher warned.

“Congress’ change of heart on the withholding issue in 2011 should give industry absolutely no assurances that Congress cannot (or will not) again be persuaded by equally bad ideas based on unrealistically rosy revenue projections,” he wrote.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

The Fed 100

Read the profiles of all this year's winners.

Featured

  • Then-presidential candidate Donald Trump at a 2016 campaign event. Image: Shutterstock

    'Buy American' order puts procurement in the spotlight

    Some IT contractors are worried that the "buy American" executive order from President Trump could squeeze key innovators out of the market.

  • OMB chief Mick Mulvaney, shown here in as a member of Congress in 2013. (Photo credit Gage Skidmore/Flickr)

    White House taps old policies for new government makeover

    New guidance from OMB advises agencies to use shared services, GWACs and federal schedules for acquisition, and to leverage IT wherever possible in restructuring plans.

  • Shutterstock image (by Everett Historical): aerial of the Pentagon.

    What DOD's next CIO will have to deal with

    It could be months before the Defense Department has a new CIO, and he or she will face a host of organizational and operational challenges from Day One

  • USAF Gen. John Hyten

    General: Cyber Command needs new platform before NSA split

    U.S. Cyber Command should be elevated to a full combatant command as soon as possible, the head of Strategic Command told Congress, but it cannot be separated from the NSA until it has its own cyber platform.

  • Image from Shutterstock.

    DLA goes virtual

    The Defense Logistics Agency is in the midst of an ambitious campaign to eliminate its IT infrastructure and transition to using exclusively shared, hosted and virtual services.

  • Fed 100 logo

    The 2017 Federal 100

    The women and men who make up this year's Fed 100 are proof positive of what one person can make possibile in federal IT. Read on to learn more about each and every winner's accomplishments.

Reader comments

Fri, Jan 13, 2012 Erich Darr

Currently agencies only report to the IRS payments to for profit contractors for services, when such payments exceed $600 per year. If you're trying to catch cheaters, tt makes much more sense to report payments for both materials and services.

Fri, Jan 13, 2012

The Feds typically pay more money for their contracted projects than the private sector because of all the hoops they make their contractors jump through. The 3% Withholding was just another hoop that would ultimately cost the taxpayers even more money. Because too many in Congress as well as the upper levels of Government have never had to run a business, they have no clue just how destructive their rules and other regulations are to business as well as how much they hurt their budget - and ultimately the taxpayers.

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

More from 1105 Public Sector Media Group