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Rep. Sam Graves: The 3% Withholding Is Yet Another Burden For Small Businesses

Imagine that you are a small business owner who has a thin two to five percent profit margin during a tough economy and are trying to avoid laying off workers. On top of this, the federal government will begin keeping 3% of the money it owes you until the Internal Revenue Service acknowledges – months or years later – that you had already been paying your taxes. Although Halloween is just around the corner, this isn’t just another scary story — it is a burden that millions of small businesses will face if Congress doesn’t repeal the 3% withholding tax.

David Kellogg, President and CEO of an information technology services contractor in Arlington, VA., discussed his frustration at a September press conference about the 3% withholding tax, when he said, “This is a one-time shot of revenue for the federal government, but it’s a long-term compliance issue for every business in the United States that does business with the federal government, local government and state government. It’s going to drive up the cost of services and products procured by the federal government. I have revenues of approximately $60 million and I’m going to have to make a $2 to $3 million dollar loan to the federal government that I’m never going to get back. That’s pretty close to my after-tax profit on a yearly basis!”

This onerous provision was originally enacted to address the loss of revenue attributed to the “tax gap” — government contractors and others who receive government payments but who do not fully pay the tax that the IRS believes is owed. However, this is not the way to go about it. Instead of imposing higher costs on law-abiding citizens and small businesses, efforts to close the tax gap should target those already failing to pay their taxes.

This withholding policy is such a bad idea that when it was enacted in 2006, Congress immediately delayed its implementation. And it has been delayed twice more since that time. But postponements don’t solve the problem. The threat of implementation remains and businesses continue to face uncertainty about the future costs they will incur.

Compliance with this withholding tax will impose significant financial burdens on both the public and private sectors, adversely affecting job creation and economic growth at a time when we can least afford it. It will also further limit the cash flow of small companies that operate with thin margins in a difficult economy. Startups and small firms with a high volume of government contracts will be particularly disadvantaged.

On Thursday, the House will vote on a bill to repeal this onerous burden. The new House majority has been focused on jobs since day one, passing fifteen separate ‘jobs’ bills that can grow our economy and help create millions of jobs.

"Repeal, instead of another deferment, is needed because small businesses need certainty in order to spark growth and create jobs and I am hopeful that this is what the House will decide this week." -Chairman, House Small Business Committee, Rep. Sam Graves (R-MO)

Although I applaud the President’s acknowledgement that this withholding tax is damaging to small businesses, delaying it is not providing relief to companies that are deciding whether or not to bid on multi-year contracts that will be subject to the 3% withholding tax. If they decide not to bid, everyone loses: the government loses out on competition, and pays higher prices. The small businesses lose an opportunity to compete, and are unable to create or sustain jobs.

Some contractors are already declining to bid on long-term contracts due to this uncertainty, which inhibits competition. In addition, many are already expending funds to prepare for implementation down the road.

Repeal, instead of another deferment, is needed because small businesses need certainty in order to spark growth and create jobs and I am hopeful that this is what the House will decide this week.

Congressman Sam Graves (R-MO), is the Chairman of the House Small Business Committee.