3 PERCENT WITHHOLDING Just Another “Bad Memory” For Contractors

Written by  Stephen Sandherr


Imagine if the police decided that the best way to combat speeding was to issue every driver a speeding ticket and require he or she to pay the fine. Then they would offer to provide refunds to the vast majority of drivers that proved, months later, that they hadn’t been speeding. Crazy right?

Now imagine that the police are actually the federal government, that the drivers are actually contractors, and that instead of issuing speeding tickets, they impose a 3 percent fine on every payment those contractors receive for services rendered to all large cities, states, and the federal government, redeemable only after they prove they didn’t cheat on their taxes. The scenario you are conjuring isn’t just some Kafkaesque nightmare; it was actually a law that had been set to go into effect in 2013 known as the 3 Percent Tax Withholding Rule that AGC recently helped kill.

The ostensible rationale for this new tax measure was to ensure that government contractors pay all their taxes. But this solved a problem that didn’t exist. As anyone that has ever been on the receiving end of an Internal Revenue Service audit can attest, the government already knows how to collect what it is due. And there simply isn’t any data that government contractors are so likely to cheat on their taxes to justify treating all employers like they are guilty until they can prove their innocence.

The real reason for this new tax measure was that it would have provided Congress billions extra each year in tax receipts that it can use to plug budget gaps. It didn’t matter that 97 percent of those dollars would have been returned to contractors the following year as part of their tax returns, because there would be a new batch of withheld funds to use. In other words, employers across the country would have been forced to provide interest-free loans to the government.

The allure of government contracts has always been stability and not high profits. The margin for most publicly funded construction projects is smaller than for private construction, typically less than 3 percent.

But the new tax withholding measure would have forced employers to perform government work for no profit at all, or more realistically, to increase the amount they charge. As AGC members made clear in a survey the association released in October, the tax measure would have inflated the cost of government services and forced taxpayers to pay more for services. In other words, this new tax withholding measure would have needlessly harmed employers and punished taxpayers.

As troubling and potentially debilitating as this new tax measure would have been, it is sadly consistent with the mindset that has taken hold in some quarters of Washington that businesses will cheat, harm, and pollute with reckless abandon if left to their own devices. For example, after decades of working with employers to help them successfully improve workplace safety, federal inspectors are being told to assume the worst out of businesses and are being given fine and citation quotas. And instead of finding ways to encourage more efficient operations, businesses are being given costly new emissions mandates and forced to replace perfectly good equipment with new, “greener,” gear.

The overarching assumption is that were it not for the heavy— and costly—hand of government, businesses would do no good. As a result, employers are being forced to spend more to comply with a host of new regulatory burdens—In addition to new tax withholdings—while being treated with near-contempt. This is an odd way to interact with the businesses we are supposedly relying on to add jobs and rebuild our economy.

Fortunately, after an intensive lobbying and media relations campaign, and the help of thousands of AGC members, the House and Senate have both voted overwhelmingly to repeal this misguided measure. And with any luck, by the time you read this, the President will have signed the repeal into law, making the 3 percent tax withholding mandate a bad memory. While getting this bad measure repealed took a lot more time, work, and energy than it should have, it is nice to see that our elected officials can come together to make life a little easier for employers and workers.

MediaEDGE Logo sml