Capitol Hill

In 2006, Congress passed the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. Unfortunately, for roofing contractors and other businesses that contract with government agencies, this law contains an onerous tax increase scheduled to take effect Jan. 1, 2012.

Section 511 of TIPRA mandates tax withholding at a 3 percent rate on payments to vendors for goods and services on all federal contracts, as well as those issued by state and local governments with expenditures of $100 million or more. The provision's objective, according to lawmakers who inserted it into the bill, is to increase vendor and contractor compliance, thus collecting underreported tax revenues.

Bad public policy

The 3 percent of payment to be withheld would be taken off a contract's total value, not the profit earned on the project. Therefore, the withholding law initially would eliminate contractors' profits on many projects. Although contractors may collect the 3 percent tax at the end of the year, disruptions in cash flow and operating capital caused by withholding would be a tremendous burden, particularly for small businesses.

For example, bookkeeping systems are not set up to account for amounts withheld from invoices. Withholding also would complicate tax filings and the need to accurately determine tax liability. Additionally, disruptions in operating capital negatively may affect a company's ability to become bonded.

The 3 percent withholding law is a quintessential example of poor legislating. The provision was not contained in either version of the TIPRA bill originally passed by the House and Senate but instead was dropped into the final bill at the last minute during a House and Senate conference committee meeting. Therefore, it received virtually no scrutiny or public input before becoming law.

If members of Congress had asked the business community for input before inserting the provision at the eleventh hour, they might have realized it is bad public policy. It punishes honest businesses, making it more difficult for entrepreneurs to create jobs and grow the economy, and does little, if anything, to improve tax compliance and increase the government's tax revenue.

In fact, it appears withholding could end up costing the federal government more money than it would collect in tax revenue. The provision originally was projected to generate $6 billion to $7 billion in new revenue for the government, which mostly is attributed to acceleration in tax receipt collection during the first year of implementation. In subsequent years, only about $200 million is expected to be generated. And a recent study by the Government Withholding Relief Coalition found changes that must be made to government accounting systems to implement the provision will cost the government at least $20.2 billion during a five-year period.

Supporting repeal

NRCA has been working with a coalition of business organizations to lobby Congress to repeal this burdensome law, and efforts are gaining momentum. NRCA is urging Congress to immediately pass the Withholding Tax Relief Act of 2011 (H.R. 674/S. 164), sponsored by Rep. Wally Herger (R-Calif.) in the House and Sen. Scott Brown (R-Mass.) in the Senate.

However, though support for repeal legislation is growing, the federal government's extremely difficult budget situation is a formidable obstacle to passing the legislation. Because the law is expected to raise revenue for the government, the lost revenue must be offset with alternative tax increases or spending cuts to avoid adding to the deficit.

Therefore, delaying the provision's effective date by two to three years may be the best achievable outcome in 2011, allowing NRCA and the coalition to work toward full repeal in 2013. NRCA will continue working to repeal the withholding law because doing so is vital to job creation and economic growth in the roofing industry.

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