State and local government officials are applauding House Ways and Means Committee members on the eve of an expected vote to approve legislation that would repeal a 3% withholding requirement that they warn would be costly and burdensome.

The committee has scheduled a vote for Thursday on HR 674, a bipartisan measure that would repeal tax-law provisions requiring governments that have $100 million or more of vendor contracts for goods and services each year to withhold and remit to the Internal Revenue Service 3% of contract payments of $10,000 or more.

Implementation of the withholding provisions, which were included in the Tax Increase Prevention and Reconciliation Act of 2005 to prevent government contractors from cheating on their taxes, has been repeatedly delayed and they are now scheduled to take effect on Jan. 1, 2013.

But Republican leaders in the House are pushing forward with the repeal bill, which was introduced in February by Rep. Wally Herger, R-Calif., saying it’s supported by members of both parties and will help small businesses and governments as well as the economy. The bill has at least 263 co-sponsors.

House Majority Leader Eric Cantor, R-Va., has said he hopes Congress will pass the bill this month.

The Joint Tax Committee has estimated that a repeal of the provisions would reduce revenues by $11.2 billion over 10 years.

But in a letter sent Tuesday to the committee chairman, Rep. Dave Camp, R-Mich., the Government Finance Officers Association said the requirement would “impose … an unfunded mandate on state and local governments” as well as “undue administrative and costly burdens.”

“This additional layer of bureaucracy is unlikely to yield more than what could already be collected, and could actually prove to be more costly to the federal government, as its departments must also make changes to their systems and absorb additional vendor costs in order to comply with the law,” said the letter, which was signed by Susan Gaffney, director of GFOA’s federal liaison center.

The National Association of Counties and the National Association of State Auditors, Comptrollers and Treasurers sent letters to committee members warning that the requirement would increase costs for governments when they are already strapped for cash.

NASACT president Ronald Jones wrote Camp and the committee’s top Democrat, Rep. Sander Levin, D-Mich., that the requirement would “cause state and local governments to focus scarce resources on implementation at a time when those same resources are desperately needed to carry out important government programs.”

“While we support efforts to close the tax gap, we do not believe imposing costly withholding mandates on state and local governments or severely limiting cash flow for government contractors will address non-compliance,” said Jones, a chief examiner in Alabama.

“For county governments,” NACO executive director Larry Naake wrote committee members in a letter, “the sophistication of systems needed to capture and report the required data varies greatly and most do not have the resources, capacity or staff to undertake the required withholding and remittance.”

The National Conference of State Social Security Administrators sent committee members a letter containing a detailed accounting by Virginia Beach of the costs and difficulty of implementing such a requirement. It said the repeal “is of vital importance and urgency to state and local governments throughout the country.”

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