By Kevin Bogardus - 10/26/11 09:15 AM EDT
After five years of steady lobbying, business groups say they are on the verge of vanquishing a hated withholding tax.
The House is expected to approve legislation this week that would repeal an IRS plan to withhold 3 percent of payments to contractors at every level of government.
“It has been a steady, consistent multiyear slog until we get the votes on it,” said Jade West, senior vice president of government relations for the National Association of Wholesaler-Distributors (NAW).
House approval of the legislation could build momentum for repeal in the Senate, where there is already broad support for axing it.
Fifty-seven senators voted for repeal of the withholding tax last week, just three votes shy of the total needed to move to passage. The vote likely came up short because of a dispute over what Senate Minority Leader Mitch McConnell (R-Ky.) used to pay for the lost tax revenue: $30 billion in unobligated federal funds.
Implementation of the withholding tax has been delayed several times since it was signed into law in 2006. The 2009 stimulus law pushed it back to 2012, and the IRS proposed the rule for the tax this May, delaying it until 2013.
The lobbying to stop the withholding plan began almost immediately after it was enacted.
A coalition of more than 150 business groups called the Government Withholding Relief Coalition formed specifically to push for repeal. NAW is a member of that group, as is the U.S. Chamber of Commerce.
Giovanni Coratolo, vice president of small business policy for the Chamber, said a surge of “old-fashioned grassroots lobbying” has forced Congress to act.
“We wanted to raise this to a whole new level. They just got hot and mad [about withholding], just like when they heard about the 1099 for the first time,” Coratolo said, referencing the now-repealed 1099-reporting requirement that was in the healthcare reform law.
“That was our strategy: to really shine a light on it. They made calls to their senators and congressmen about this,” Coratolo said.
Universities, city governments and giant government contractors like Science Applications International Corp. and Lockheed Martin have lobbied on the withholding tax over the years, according to disclosure records.
Coratolo said the tax if went forward, it would affect “any transaction between the private and public sector.”
“This is a huge issue. It impacts everything,” Coratolo said. “Say a fire department wants to buy a fire engine, or a public university wants to build a new wing.”
Critics of the repeal drive say lawmakers are removing what would be a tough enforcement mechanism for the IRS to help close the gap between what taxes are owed and what’s actually collected.
“It’s the latest sad reversal of cutting down on tax cheating,” said Chuck Marr, director of federal tax policy for the liberal-leaning Center on Budget and Policy Priorities. “Withholding is a very effective way to enforce the tax code.”
Marr pointed to a 2007 report by the Government Accountability Office that found more than 63,000 government contractors owed close to $8 billion in taxes.
Nonetheless, the withholding tax remains firmly in lawmakers’ sights.
President Obama’s recommendations to the supercommittee, which is tasked with finding at least $1.2 trillion in budget cuts, included delaying the withholding tax for another year, until 2014.
The House will vote on a repeal of the 3 percent withholding tax on Thursday, according to a House leadership aide.
The lost revenue will be offset by legislation sponsored by Rep. Diane Black (R-Tenn.) that sets strict limits on Medicaid eligibility — a move that was also recommended by the president to the supercommittee. Black’s bill will also be voted on Thursday, the aide said.
McConnell supports using the strict Medicaid limits outlined in Black’s bill to offset the repeal of the tax.
“We think the Senate should pass it now, without adding poison pills, and send it to the president for his signature. And since the whole thing is taken from the president’s proposals, surely the president will join the call for passage,” said Don Stewart, a McConnell spokesman.
The Obama administration released two statements of policy that supported passage of Black’s bill, as well as the repeal of the withholding tax.
A spokesman for McConnell said the Senate should take up the House bill next week.
“Sen. McConnell is encouraged to see that the President will now support this provision of his own bill. While we tried to pass it last week with a different bipartisan offset, Democrats blocked it. Now, with the President’s support, the Senate should take it up next week, without adding poison pills, and send it to the President for his signature,” said Don Stewart, a spokesman for McConnell.
Marr said if repeal does happen, lawmakers will need to find another method for enforcing the tax code.
“If they repeal it, they should replace it with something to address the tax cheating,” Marr said. “They shouldn’t ignore what the GAO has uncovered.”
Rachel Leven contributed to this report.