Dispute over lost revenues holds up repeal of 3 percent withholding rule

Congressional Republicans and Democrats — not to mention the Obama administration — want to take aim at a government withholding rule fiercely opposed by the business community.

But it still seems like the push to repeal a regulation requiring federal, state and certain local government agencies to withhold 3 percent of payments to contractors might hit some turbulence.

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As it stands, the two parties have different ideas over how to make up for the revenues lost by repealing the 3 percent withholding provision, which also applies to Medicare and farm payments.  

The regulation, which was enacted in 2006 to help battle tax evasion among government contractors, is now set to go live at the beginning of 2013 after its implementation was delayed two separate times. Around the time it was enacted, the Joint Committee on Taxation estimated that the provision would raise almost $7 billion over five years.

Senate Majority Leader Harry Reid (D-Nev.) and other Democrats — while acknowledging that the regulation would ensnare compliant contractors — have also expressed concern about letting off tax delinquents.

“The problem is 3 percent applies to the good, the bad and the ugly. And that’s really not fair,” said Sen. Kent Conrad (D-N.D.), the Budget Committee chairman. “The vast majority of people who are good are being hit with the same thing as those who caused the problem. And we really ought to focus on the wrongdoer.”

In his jobs plan, President Obama proposed pushing the rule back another year, to 2014.

But business groups continue to push for a full repeal, and Republicans appear interested in writing off the 3 percent rule as a failed experiment.

“I think we ought to leave it behind,” said Sen. Orrin Hatch (R-Utah), the ranking member of the Senate Finance Committee.

A GOP measure to repeal the rule already failed to clear a procedural vote in the Senate on Thursday, with Democrats and the Obama administration firmly opposed to the Republicans’ proposal to pay for the lost revenues by withdrawing unobligated discretionary funds.

The House, meanwhile, is expected to take up, and pass, its repeal measure this coming Thursday. House Majority Leader Eric Cantor’s (R-Va.) office signaled Friday that a separate tax bill that puts more stringent Medicaid eligibility requirements into place would offset the 3 percent regulation.

Reid has already indicated that he will pursue other ways to pay for repeal, including getting rid of a tax break for corporate jet owners that Democrats and Republicans sparred over during this summer’s debt-ceiling negotiations.

The Senate majority leader also said Thursday that he wants more explicit assurances that contractors are paying their federal taxes.

“Senate Democrats are considering an alternative amendment to address concerns that have been raised, while ensuring tax evaders aren’t receiving government contracts,” a Democratic aide in the chamber said.

As of now, it’s unclear when that alternative might be released, though Conrad told reporters on Thursday that he expects it not long after the Senate returns to Washington from a one-week break.

For its part, the U.S. Chamber of Commerce has said the time is long past for “expeditious, unconditional, full repeal,” comparing the 3 percent rule to the 1099 reporting requirement in the healthcare overhaul that was rolled back this year. 

And the Government Withholding Relief Coalition, a group that counts the Chamber among its members, has signaled that policy changes since 2006 have dealt with tax evasion among contractors, citing requirements that contractors certify that they’re up-to-date on their taxes.

“Much has already been done to resolve the non-compliant contractor problem,” a Chamber statement said. “Bottom line, we need to fully repeal the 3 percent withholding tax now.”