Repeal of Contractor 3% Withholding Rule Sent to Obama to Sign

The U.S. House of Representatives passed and sent to President Barack Obama legislation to repeal a requirement that federal, state and local governments begin withholding 3 percent of payments to contractors in 2013.

After months of bouncing between the two chambers of Congress, the measure cleared its final legislative hurdle with yesterday’s 422-0 House vote. The legislation also includes tax credits for companies that hire unemployed veterans.

Obama has said he would sign the bill into law, marking one of the few areas of agreement between the Obama administration and congressional Republicans. The House passed the bill as members of Congress’s deficit-cutting supercommittee continue to see if partisan disagreements over taxes can be bridged.

“Congress demonstrated that when we work together, we can find bipartisan solutions to laws and regulations that stifle job creation,” House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, said in a statement after the vote.

Obama praised Congress for attaching the veterans measure to the repeal bill.

“I want to congratulate Republicans and Democrats in Congress for coming together to pass these tax credits that will encourage businesses to hire America’s veterans,” he said in a statement yesterday.

Contractors Backed Repeal

Congress passed the withholding requirement in 2006 to reduce tax evasion among government contractors. Stephen E. Sandherr, chief executive officer of the Associated General Contractors, an Arlington, Virginia-based trade group, said the provision would have amounted to “billions in interest-free loans to the federal government.”

The repeal “will provide some much-needed relief for a hard-hit industry and its struggling workers,” Sandherr said in a statement.

Repealing the withholding measure would deprive the Treasury of $11 billion in revenue over 10 years, according to the congressional Joint Committee on Taxation. Lawmakers agreed to offset the forgone revenue by changing a provision of the 2010 health-care law.

The offset would include the nontaxable portion of Social Security benefits in the definition of income used to calculate eligibility for government health-care programs. It would move some people from Medicaid into subsidized coverage in new health-insurance exchanges and would push others out of subsidized coverage.

Democrats in both chambers were reluctant to agree to that approach. On Nov. 4, Senate Democrats added the veterans measure to the legislation to ensure passage.

Hiring Veterans

That portion of the bill would offer tax credits ranging from $5,600 to $9,600 to companies that hire former members of the military who are unemployed. It would be offset by limiting pensions to veterans with no dependents or those in Medicaid- covered nursing homes and by allowing the U.S. Department of Veterans Affairs to collect fees on mortgages.

The 3 percent withholding measure is among several congressional efforts to crack down on tax evasion that business lobbyists have successfully opposed. In April, Obama signed into law a measure scrapping a provision of the health-care overhaul that sought to curb underreporting of income by requiring businesses to report a greater number of transactions.

Also, the Internal Revenue Service has agreed to delay implementing a law mandating overseas banks to withhold from some U.S. customers. A separate law requiring companies that process and settle credit-card transactions to report payment amounts to the U.S. also has been delayed.

The 3 percent withholding repeal bill is H.R. 674.

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

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

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