By Larry Jones
November 7, 2011

The House voted overwhelmingly on October 27 to approve a Conference legislative priority, legislation (H.R. 674) that would repeal a burdensome rule scheduled to go into effect January 1, 2013. Under the rule federal, state and local government agencies would be required to withhold three percent of payments of $10,000 or more made to contractors for goods and services. Passage of the legislation is a significant development for the Conference of Mayors who identified the issue as a priority in its Common'sense Jobs Agenda last September. The agenda outlines a number of practical options for Congress to consider to create more jobs. Congress is urged to repeal the 3% Withholding Rule, which imposes undue burdens on government agencies, and stands in the way of job creation for many employers including small businesses.

Enacted in 2006 to help the Internal Revenue Service gather better information on the full amount of payments received by government contractors for income tax purposes, the rule was originally scheduled to take effect in 2011 but was delayed several times after strong protest from government and industry groups. Government agencies at all levels – federal, state and local – expressed strong opposition to using scarce resources to set up burdensome and costly record keeping and accounting procedures to collect and remit federal taxes. Government contractors expressed strong opposition to the IRS receiving three percent of their payments and holding it for over a year, which, for most government contractors, would cause harmful cash flow disruptions.

The repeal legislation enjoyed strong bipartisan support and passed the House by a vote of 405-16. House Speaker John Boehner said, “This bill repeals an unnecessary tax that would threaten thousands of jobs and hurt every small business who works with local, state and the federal agencies.” Repealing the rule will cost the federal government an estimated $11 billion in revenues over the next ten years according to the Joint Committee on Taxation. To offset the cost, the House approved a separate measure (H.R. 2676) by a vote of 262-157 that would raise an estimated $13 billion by changing the definition of income to make it more difficult for some Social Security recipients to qualify for Medicaid under the health care reform legislation adopted last year.

President Obama has voiced support for both the repeal legislation and offsetting revenue measure, which have been combined and sent to the Senate for consideration. On November 1, Senator Scott Brown (MA) held a press conference to announce that he was formally introducing the House passed bill in the Senate and to urge his colleagues to support swift passage. Earlier on October 20, the Senate voted against debating a similar bill introduced by Senate Minority Leader Mitch McConnell (KY) after President Obama threaten to veto it because it would have been paid for with cuts in domestic spending. With the President supporting both the House repeal and revenue measures, the Senate is expected to adopt the combined measure soon.