Congress and President Agree on Something: Killing 3% Withholding

On November 21, the President signed into law H.R. 674, the "3% Withholding Repeal and Job Creation Act." The Act repeals the controversial 3% withholding requirement on government contractor payments.

The Tax Increase Prevention and Reconciliation Act of 2005 required the Federal government and the government of every state, political subdivision of a state, and instrumentality of a state or state subdivision making certain payments to a person providing any property or services (e.g., payments to a government contractor) to deduct and withhold 3% from that payment.

Although the withholding requirement was originally set to apply to payments made after 2010, it was subsequently deferred to apply to payments made after 2011 by the American Recovery and Reinvestment Act of 2009, then deferred again to apply to payments made after 2012. The requirement to withhold is now completely repealed.

In its explanation of the new law, the Ways and Means Committee cited the following reasons for repealing the withholding requirement:

• the withholding requirement would reduce cash flow to many cash-strapped employers that contract with governmental entities and undermine job creation;
• the "looming implementation" of the withholding requirement is contributing to the uncertainty facing employers during already uncertain economic times;
• the withholding requirement would impose substantial costs on Federal, State, and local governmental agencies required to withhold payments; and
• the withholding requirement could also cause small businesses contracting with governmental entities to adjust their prices in order to address the changes in their cash flows, potentially resulting in increased procurement costs at all levels of government.