Capitol Hill

In 2006, Congress passed a law requiring federal, state and many local governments to withhold 3 percent from nearly all payments made to contractors for goods or services. If this law is allowed to take effect as scheduled in January 2012, it will cause serious disruptions for roofing contractors engaged in government work.

A misguided law

Getting Congress to repeal this misguided law remains a priority for NRCA though the issue has not received much attention from lawmakers in recent months.

In early 2009, NRCA worked with Congress and the Government Withholding Relief Coalition to have the law's original effective date—Jan. 1, 2011—delayed by one year. NRCA's ultimate goal is passage of legislation (H.R. 275) to repeal the law.

Congress meant well when it approved the withholding provision as part of a broader tax cut bill in 2006. The measure's intent is to increase tax compliance by collecting underreported tax revenues. Once implemented, it is projected to generate more than $7 billion in revenue for the federal government.

But good intentions often don't result in good public policy.

When Congress attempted to devise a way to increase tax compliance in the government contracting area, there was little consultation with the business community and government agencies. Instead, the 3 percent withholding provision was added to a larger tax bill during a House and Senate conference committee—the final stage of the legislative process. The provision had not been in the House or Senate versions of the larger bill before the conference committee. Moreover, there were no hearings or other opportunities for the business community and other interested parties to protest or provide input before the provision became law.

Adverse effects

If the law is not repealed, roofing contractors who perform many types of government contracts will be adversely affected.

The 3 percent that is to be withheld is a flat percentage of the total payment and bears little relationship to a contractor's taxable income earned on a project. Although the contractor may collect the 3 percent that is withheld from the government at the end of the year, the withholding will restrict cash flow and result in serious operating capital disruptions, particularly for small businesses. This could negatively affect a company's ability to become bonded, which could prevent it from being eligible to bid on some government contracts. The withholding process also will disrupt many contractors' accounting systems and tax filing procedures.

The 3 percent withholding law also will have negative consequences for government agencies.

For example, the Department of Defense has estimated the law will cost the agency $17 billion during the first five years, which far exceeds the federal government's revenue gains.

Additionally, the Congressional Budget Office determined government withholding is an unfunded mandate on state and local governments because it will impose more than $50 million in annual costs on these entities.

An unfair burden

Clearly, this law will unfairly burden honest taxpayers in an effort to crack down on those who fail to pay taxes.

NRCA is working with other business groups to urge Congress to repeal the law as soon as possible. However, with the 2012 effective date far off in political terms, it's difficult to get members of Congress to focus on this less pressing problem.

Moreover, because the provision is officially "scored" by congressional budget rules as bringing in revenue to the federal government, any legislation to repeal it must be offset with tax increases or spending cuts to prevent increasing the budget deficit. So as federal deficits grow, repealing the withholding law becomes more difficult.

Despite these obstacles, NRCA will continue to pressure Congress to address this issue of vital importance.

Duane L. Musser is NRCA's vice president of government relations.