House Considers Health Changes to Ease Contractor Tax Burden

A House panel approved legislation making it tougher for some Social Security recipients to receive subsidized health insurance and repealing a requirement that the Internal Revenue Service withhold 3 percent of government contracts.

The health proposal, approved today by the Ways and Means Committee on a 23-12 vote, would raise $13 billion for the U.S. government over the next decade. The contractor tax bill, backed on a voice vote, would cost the government $11 billion in forgone revenue, according to the congressional Joint Committee on Taxation.

The bills may be combined for a deficit-neutral approach to passing the repeal of the contracting requirement. Ways and Means Chairman Dave Camp, a Michigan Republican, said no decision has been made about whether the two bills will be combined. House Majority Leader Eric Cantor, a Virginia Republican, has said he expects the contract measure to be taken up by the House this month.

Lawmakers lauded the contractor bill as a step toward removing an administrative burden on tax-compliant companies that have been campaigning for repeal.

“Permanently repealing this tax is an important step toward giving these businesses the assurance that it’s safe to invest, grow and hire more workers,” said Representative Wally Herger, a California Republican.

Changing Income Definition

The health bill, sponsored by Republican Representative Diane Black of Tennessee, would change the definition of income used to calculate eligibility for Medicaid or health insurance subsidies under the 2010 health-care law. Taxpayers would be required to include in their income Social Security benefits that are excluded from taxable income. The health-care law features a definition that requires inclusion of similar income sources, such as tax-exempt interest.

The change would prevent middle-income Americans from benefitting from a program designed for the poor, Black said today.

“It is our duty to ensure the very scarce Medicaid resources are there for those in most need,” she said.

The provision would affect a minority of Social Security recipients, including those receiving disability benefits and early retirees who aren’t yet eligible for Medicare, said Paul van de Water, a senior fellow at the Center on Budget and Policy Priorities in Washington, which advocates for low-income families.


The proposal would tie eligibility for health benefits to a more comprehensive definition of income, he said. Some people would shift from Medicaid into health insurance exchanges, while others would lose eligibility for subsidies.

“Although the number affected is not huge, the people affected still have relatively modest incomes, so that’s a downside to it,” Van de Water said.

The Obama administration included a version of the Social Security proposal in a deficit-reduction plan in September, and Republicans emphasized the administration’s support.

The contractor repeal bill, supported by the U.S. Chamber of Commerce and affected state and local governments, would end a 2006 requirement intended to prevent tax cheating by contractors that is scheduled to take effect in 2013. Business groups contend that it creates unnecessary administrative burdens for companies complying with tax laws.

Majority Support

Under the requirement, when a company receives a $1 billion contract, for example, the government would keep $30 million until the company files its next tax return.

Lawmakers said that it would cost the government more to administer the requirement than it would generate in revenue.

The bipartisan repeal bill in the House has 263 co-sponsors, or more than 60 percent of members.

Democrats, who backed the contractor bill, questioned offsetting its cost by curtailing the health care law they supported last year.

Representative Sander Levin of Michigan, the top Democrat on the committee, said Congress should proceed carefully in pairing the health and contractor bills.

“This is an offset that affects individuals and it’s being used to pay for a provision that principally affects businesses,” he said.

The government hasn’t let the contractor tax requirement take effect. Congress delayed it as part of the 2009 stimulus law, and earlier this year, the IRS pushed the start date back to 2013. President Barack Obama included a delay to 2014 in his most recent jobs legislation.

‘Revenue Lost’

Senator Charles Grassley of Iowa, who was Finance Committee chairman when the contractor withholding tax law was written in 2006, said in an interview that he didn’t want to end the requirement without addressing the issue of tax cheating by contractors.

“There’s still a lot of revenue lost,” said Grassley, a Republican. “We’re trying to find another way to collect it without the 3 percent.”

Camp said after the vote that he hasn’t talked with senators about advancing the contractor bill.

“We have something now to take over,” he said.

The bills are HR 674 and HR 2576.

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