Obama Backs Repeal of 3% Federal Contractor Tax Withholding

The Obama administration supports U.S. House bills that would repeal a 3 percent withholding requirement for government contractors and pay for it by altering the eligibility for Medicaid and other health programs.

The statements of support today from the White House Office of Management and Budget leave the Senate as the only hurdle to the repeal effort. The House will begin consideration of the repeal tomorrow and could hold a final vote by Oct. 27.

Preventing the withholding requirement from taking effect as scheduled in 2013 is one of few areas of agreement between President Barack Obama and congressional Republicans on economic policy. The debate on the withholding issue has been over how, and whether, to offset $11 billion that the repeal would cost the Treasury in forgone revenue over 10 years.

The administration said today it would agree to an offset proposed by Republicans, which raises $13 billion over 10 years. The offset would change the 2010 health-care law to include the non-taxable portion of Social Security benefits in the definition of income used to calculate eligibility for government health care programs. It would push some people from Medicaid into subsidized coverage in new health-insurance exchanges and would push other people out of subsidized coverage.

“The administration looks forward to working with the House to ensure” the offset “achieves the intended result,” according to the statement of administration policy.

Senate Bill Blocked

The administration’s support was announced less than a week after the Senate blocked a similar repeal measure because of disagreement over an offset. The Senate bill, offered by Republicans, would have offset the repeal by tapping unused federal funds.

Senate Majority Leader Harry Reid, a Nevada Democrat, said Oct. 21 he would offer a repeal bill that would be offset through new taxes on corporate jets and curbing the credits that can be claimed by companies that pay taxes to other countries.

Congress passed the withholding requirement in 2006 to combat tax evasion among government contractors. It hasn’t taken effect and was delayed after the U.S. Chamber of Commerce and other business groups said it was too burdensome.

The House repeal bill is HR 674 and the health bill is HR 2576.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net