Budget cuts critical to repeal of withholding

The repeal of a payment withholding tax has a growing consensus of support in Congress, but ending the tax hinges on offsetting the lost revenue.

Senate Minority Leader Mitch McConnell (R-Ky.) could not gather 60 senators on Oct. 20 to bring to a vote his Withholding Tax Relief Act (S. 1726). The legislation would repeal the tax that requires the government to withhold 3 percent of contract payments to businesses.

The tax was enacted in 2006, but officials have continually delayed its enforcement. Currently, the tax goes into effect in 2013.

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It’s a tax that both Democrats and Republicans say would hinder economic growth, particularly among small businesses since they would have less cash coming with their payments.

The issue with McConnell’s bill though was that it offset an estimated $11.2 billion in revenue over 10 years, with $30 billion in cuts to unspent money.

Democrats said this was the wrong approach. Senate Majority Leader Harry Reid (D-Nev.) urged senators to oppose McConnell’s bill because he has an alternative plan with funding offsets.

The Obama administration too was wary of McConnell’s proposal due the proposed offsets. On Oct. 20, the Office of Management and Budget's statement of administration policy said the legislation’s offsetting cuts would be a major mistake.

“The bill’s unspecified rescission of $30 billion in appropriated funds would cause serious disruption in a range of services supported by the federal government,” OMB officials wrote. OMB said a veto was possible because of the offsets.

Nevertheless, the administration also said it’s committed to working with Congress on a balanced approach to reducing the deficit. In other words, officials are willing hash out acceptable offsets to the repeal.

The repeal is coming to the floor of the House for a vote on Oct. 27. The House bill to repeal the withholding tax has bipartisan support with more than 200 members backing it.

There is a hitch though. The bill (H.R. 674) doesn’t include offsets to the lost revenue. But the Ways and Means Committee approved a related bill that proposes reforms to health care programs, which may be a way to offset costs, said Trey Hodgkins, senior vice president for national security and procurement policy at TechAmerica. He said though that the two bills have not yet been formally connected.

He said the two bills may be moving ahead independently to keep Democratic support, since health care is a touchy issue.

Hodgkins said the key is finding the right areas in which to cut funding.

Without the right offsets in the House bill, the administration likely will raise the same objections as it did with McConnell’s bill, according to Alan Chvotkin, executive vice president and counsel for the Professional Services Council.

As the government attempts to find the agreeable offsets, officials throughout the government—including state and local governments—and contracting companies find themselves in limbo. Agencies have to start preparing their systems to track the payment withholdings, and companies have to make changes to their accounting systems, Hodgkins said.

It’s not cheap either. In 2008, Defense Department officials reported that they would pay roughly $17 billion to modify their accounting and entitlement systems.

The costs seem to outweigh the benefits, Hodgkins said. The tax becomes useless and unnecessary if the government spends so much money to modify its systems.

The bad economy and a desire to keep money in small businesses’ pockets has garnered support for the repeal.

“There is significant political will to repeal this,” Hodgkins said. TechAmerica and the Professional Services Council are part of a several hundred industry groups working to end the tax.

But the offsets are the key.

Hodgkins is hopeful for a compromise.

And after working since 2006 to repeal the tax, Hodgkins said, “I think we’re seeing an alignment of the stars.”