By Larry Jones
April 2, 2007

The Conference of Mayors and numerous state and local government groups submitted joint written testimony to the House Committee on Small Business on March 22 urging the repeal of Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005, which requires federal, state and local governments to withhold three-percent from payments made to vendors for goods and services.

This new law, which passed last year and is scheduled to go into effect in 2011, applies to all local governments that spend $100 million or more annually on goods and services.It is intended to help the federal government make up for a $345 billion tax gap, which is the Internal Revenue Service’s estimate of the difference between what taxpayers should have paid and what they actually paid in taxes.

By withholding these funds, local governments will act as federal tax collectors and be required to send the funds to the federal government.If the law is not repealed, this huge unfunded federal mandate will not only impose significant administrative and financial burdens on local governments as they will be required to adjust their record keeping, reporting and accounting systems, but it will drive up their costs for goods and services, as businesses will be forced to increase their costs to offset the three-percent withholding tax.

During the March 22 hearing numerous witnesses representing small businesses discussed the adverse impact that the new law will have on the business community. Eliminating and/or eroding profit margins, imposing costly administrative burdens, and restricting business growth were mentioned as some of the many problems the new law is likely to impose.

Two bills have been introduced to repeal Section 511, H.R. 1023 by Representatives Kendrick Meek (FL) and Wally Herger (CA) in the House and S. 777 by Senator Larry Craig (ID) in the Senate.The Conference is asking all mayors to urge their congressional delegation to cosponsor and support the passage of these bills.