House Republicans, eager to jump-start job-creation efforts after the debt-ceiling battle, are eyeing a top reform priority among state and local government groups as part of their plans.
House Majority Leader Eric Cantor, R-Va., said in a memo to House Republicans on Monday that he is hoping to swiftly ax the 3% withholding rule for federal, state, and local governments. The rule becomes effective Jan. 1, 2013, and could cost some states millions of dollars based on how many contracts they have outstanding with vendors.
“We will move quickly this fall to repeal this burdensome requirement and relieve construction contractors, medical providers, manufacturers, farmers, and many others providing goods and services under government contracts of the uncertainty the impending law is creating,” Cantor wrote in his memo.
The law, signed in 2006 as part of the Tax Increase Prevention and Reconciliation Act, requires governments that have $100 million or more a year in contracts to withhold 3% of the payment on any contracts of $10,000 or more. It applies to property payments as well as for services provided by outside vendors.
Its implementation was delayed until 2012 by the American Recovery and Reinvestment Act. The Internal Revenue Service in May pushed the start date back another year.
The withholding requirement became a top scourge for every interest group affected by it. The U.S. Chamber of Commerce, small business organizations, and farming groups all have called for it to be scrapped.
The law could cost Florida up to $450 million associated with the pass-through increase on contracts, according to the Government Withholding Relief Coalition, which includes the Government Financial Officers Association.
“For years, GFOA and other state and local government organizations have been working to repeal the 3% withholding law,” said Susan Gaffney, director of GFOA’s federal liaison center.
“Legislative efforts — and now possible House floor action to do so — would be a great benefit to state and local governments,” she said, adding that state and local governments would be spared costly upgrades and increased vendor costs.
The law applies to the federal government as well, and could get pricey for federal agencies. The Department of Defense, with massive contracting business, estimated in 2008 that implementation would cost $17 billion over five years.
There is legislation in both the House and Senate that would repeal the withholding requirement for good. The House legislation was introduced in February by Rep. Wally Herger, R-Calif., a member of the Ways and Means Committee.
Sens. Scott Brown, R-Mass., and David Vitter, R-La., in January introduced a bill that would kill the withholding law. Neither the House nor Senate bills have moved out of their respective committees.