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Reid Seeks to Add Penalties to Contractor Withholding Repeal

U.S. Senate Majority Leader Harry Reid said he wants to add penalties for tax-cheating contractors to a bill that would repeal a withholding requirement on contractors.

He said he won’t change a provision that would affect eligibility for Medicaid and other federal health-care programs. That provision offsets the cost of the $11 billion in forgone revenue to the Treasury from repealing the withholding provision.

“We’ll have a provision in there that will still go after the cheaters,” said Reid, a Nevada Democrat who spoke in Washington today.

The Senate is expected to consider Reid’s proposed amendment this week, along with an amendment that would provide tax credits to businesses for hiring unemployed or recent veterans. No vote on the bill or the amendment has been scheduled, and Reid hasn’t released details of his proposal.

Business groups have been lobbying Congress and urging the repeal of the contractor withholding provision, which was enacted in 2006. Under the law, scheduled to take effect in 2013, the federal government, state governments and many local governments would be required to withhold 3 percent from contracts to cover tax obligations.

‘Cost to Implement’

A coalition that includes defense contractors and city governments has maintained that the law would cost too much money to implement and would reduce the cash flow of tax-compliant contractors.

“The irony is that the cost to implement the withholding tax exceeds the amount of revenue it is expected to generate,” wrote Thomas Donohue, president and CEO of the U.S. Chamber of Commerce, in a blog post today. “With ‘solutions’ like these, who needs problems?”

Last week, Reid had said he was considering making the withholding requirement apply only to tax-delinquent contractors. The change he announced today would be different. Reid also said his amendment would include a study of the issue.

The House passed a repeal of the 3 percent withholding law Oct. 27 in a 405-16 vote. The Senate’s changes will require another House vote.

Senator Richard Durbin of Illinois, the chamber’s second-ranking Democrat, said today that he thought leaders were close to a bipartisan agreement on considering the amendment.

The withholding repeal bill is HR 674.

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