Reid Plans to Rewrite Contractor Repeal to Punish Tax Cheats

Reid Plans Rewrite of Contractor Tax Repeal Bill
Senate Majority Leader Harry Reid answers reporters questions in the U.S. Capitol on November 1 in Washington. Photo: Chip Somodevilla/Getty Images

Senate Majority Leader Harry Reid plans to rewrite a House-passed measure repealing a rule that governments withhold 3 percent of payments to contractors starting in 2013, complicating the fate of a bill backed by the Obama administration and congressional Republicans.

The Nevada Democrat told reporters yesterday that he wants to ensure that the requirement’s repeal would apply only to government contractors that are current on their tax obligations.

The comments were made less than a week after the House approved the repeal legislation in a 405-16 vote. The prospect of changes to that measure drew a frustrated response from House Republicans and business groups.

“Both the three percent provision and the pay-for were specifically supported by the White House,” Michael Steel, a spokesman for House Speaker John Boehner, said in an e-mailed statement yesterday. “It’s tough to understand why the Senate Democratic leadership doesn’t just pass the House-passed bill.”

Senate Minority Leader Mitch McConnell, a Kentucky Republican, also called for Senate passage of the House bill.

“I would hope that the Senate majority would be willing to take that up and pass it and send it down to the president for his signature in the near future,” he told reporters.

‘Delinquent’ on Taxes

The law signed in 2006 by former President George W. Bush was a response to concerns about tax evasion among contractors. While Reid said the Senate could vote on repeal this week, he said he wants to ensure that contractors who aren’t current on their taxes don’t benefit.

“We should amend it to make sure that those people who are not delinquent in their taxes, they get the benefit of what we’re trying to do,” Reid said. “Those that are not, don’t. Those that are delinquent on their taxes, you’d still withhold the money from them.”

The Obama administration has said it supports the House-passed legislation and offset.

After House passage last week, business groups including the U.S. Chamber of Commerce were poised for victory in their fight against the withholding rule. Their win, if it happens, could now be postponed. If the Senate passes the legislation with the changes Reid proposed today, it would have to go back to the Republican-controlled House for another vote.

“The House overwhelmingly passed this bill last week and it is endorsed by President Obama,” said Blair Latoff, a spokesman for the U.S. Chamber in an e-mail. “The Senate needs to pass the bill as is and stop playing politics with the issue. Failure to do so will have a dramatic, negative impact on honest tax-paying businesses across the United States, hurting their ability to create jobs.”

Complicated to Determine

Federal, state and local governments could have trouble determining whether a contractor is delinquent in paying taxes and should be subject to the withholding, as Reid envisions.

Senate lawmakers are still deciding how to offset the cost of the repeal, which would result in $11 billion in forgone revenue to the Treasury over a decade, according to the congressional Joint Committee on Taxation.

The House-passed measure offset the cost by changing the 2010 health-care law to include the nontaxable portion of Social Security benefits in the income definition 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.

Reid didn’t say whether Senate Democrats would agree to that offset. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said he would like to find a “better alternative.”

The repeal legislation is HR 674.