House Lawmakers Push for Repeal of Contractor Tax This Year

A House subcommittee will press for the repeal of a law requiring the government to withhold taxes from payments to contractors before year’s end, saying a bipartisan consensus has formed against a “bad idea.”

“This is unlikely to be stand-alone legislation,” said Representative Earl Blumenauer, an Oregon Democrat on the House Ways and Means Committee, in an interview today. “With this legislation being shovel ready, there will be vehicles and it can be dropped in any time. I’m optimistic that this will be done this year.”

Representative Wally Herger, a California Republican on the Ways and Means Committee, proposed repeal of a law enacted in 2006 to reduce tax cheating that requires federal, state and many local governments to withhold 3 percent from payments to contractors. The repeal bill hasn’t advanced. Republican Senators David Vitter of Louisiana and Scott Brown of Massachusetts also have introduced bills to repeal the withholding to contractors.

The law is opposed by some state government officials and defense contractors including Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC), who say it would require vendors to increase what they charge to government agencies. The Department of Defense has said it would cost $9 billion to update financial management systems for implementing the withholding, including costs to contractors.

The Internal Revenue Service said earlier this month it would delay the law’s effective date by one year to payments made after Dec. 31, 2012. The Obama administration supports the delay. Congress already had put off the start date for withholding from 2011 as part of the 2009 American Recovery and Reinvestment Act.

‘Coalition Building’

Representative Dave Camp, a Michigan Republican who heads the Ways and Means Committee, has “indicated his support” to advance the bill in his committee, Herger said in testimony to a House Small Business Committee panel on contracting and workforce at a hearing in Washington today.

Passage of a repeal law “has no timeline” because of the busy Ways and Means committee schedule, Herger said, adding that his proposal is in a “coalition building” stage. The U.S. Chamber of Commerce and the Professional Services Council, a contractors’ industry group, support the legislation.

Also backing the repeal effort is Democratic Representative Gerald Connolly, whose northern Virginia district received $5.46 billion in federal contracts last year, according to data compiled by Bloomberg.

Herger’s bill hasn’t advanced, in part because of uncertainty over offsetting its cost. A 2009 congressional estimate pegged the 10-year cost of a repeal of the withholding rule at $10.9 billion in lost tax revenue.

The U.S. Government Accountability Office said in 2007 that federal contractors owed more than $3.3 billion in taxes. It released a report this week showing federal agencies paid $24 billion in federal stimulus funds to contractors and grantees that owed $757 million in back taxes.

To contact the reporters on this story: Nishad Majmudar in Washington at nmajmudar@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Cary O’Reilly at caryoreilly@bloomberg.net.

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