House members support contractors in fight over pay

A bipartisan group of House members might put an end to a longstanding, but never enforced, tax provision that requires the government to keep back three percent of payments to a contractor.

The tax provision has been promoted as a way to tighten the tax gap and make delinquent companies pay their share of taxes, but its opponents say the provision would be unfair to businesses.

Ways and Means Committee Chairman Rep. Dave Camp (R-Mich.) supports the repeal of the 3 percent withholding provision in law, a spokeswoman said.

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Rep. Wally Herger (R-Calif.), a senior member of the committee, said the committee recognizes the importance of removing the law, and that Camp has expressed interest in taking action this year.

Herger has introduced legislation to kill the provision and similar legislation is in the Senate.

“Yes, it’s a problem when government contractors don’t pay their taxes,” Herger told a hearing held by the Small Business Committee’s Contracting and Workforce Subcommittee. "But instead of slapping a new tax on everyone—a tax that will actually cost the government more to collect than it raises in revenue — we could simply stop awarding government contracts to people who cheat on their taxes."

Others supporting a repeal of the provision include Rep. Mick Mulvaney (R-S.C.), the subcommittee's chairman, and Rep. Judy Chu (D-Calif.), its ranking member.

Many small business contractors work for the government for less than a three percent margin, Mulvaney said.

Thus far, none of the legislation has been considered by committees. But the provision remains unenforced because lawmakers and regulators have continually postponed its effective date. Most recently, on May 9, the IRS pushed back the date until 2013.

At the May 26 session, Rep. Jeff Landry (R-La.), a freshman, struggled to understand the reasons behind such a tax provision.

“I wonder, how do people come up with ridiculous legislation,” Landry said.