BY LAKE A. COULSON

Unless Congress enacts legislation to repeal a provision inserted in unrelated tax legislation from 2005, any entity, including contractors, performing service at any level of government will experience the worst New Year’s hangover ever as 3% will be withheld from payment, beginning in 2011. And this 3% withholding provision only adds to the possibility of increased taxation as the estate tax, which will tax the heirs of deceased business owners with a 55% tax hit for those estates valued at greater than $1 million.

As part of an effort to reduce the “tax gap,” defined as the difference between revenues coming into the Treasury’s coffers and the revenues actually received at the Treasury (estimated at around $345 billion), Congress passed legislation that would withhold 3% of payment for those doing business with federal, state or local government. Congressional tax-writing staff offer that the 3% is designed to pursue contractors that fail to pay taxes that continue to secure government contracts. Plumbing-Heating-Cooling Contractors – National Association is not trying to make light of the tax gap but believes that the IRS should enforce and prevent contractors that fail to pay taxes from ever securing government contracts. Instead of focusing on the “tax cheats” that are primarily responsible for the tax gap, Congress is using the sledgehammer approach in pursuing and penalizing honest taxpayers.

The 3% withholding puts considerable burden on PHCC’s small business members and many others in the construction industry as contractors rely on cash flow to finance expansion and to pay for materials and supplies; instead this 3% is being floated to the government in the form of an interest- free loan. PHCC believes that what Congress may not have realized is that current government contractors may ultimately decide not to play in the government’s “sandbox,” further exacerbating the problem by reducing the supply of bidders, including many small businesses, thereby increasing construction costs. In fact, the sponsor of companion legislation in the U.S. Senate, Larry Craig (R-Idaho) offered that the 3% would force companies to pass on the added costs to customers, therefore driving up construction costs for taxpayers.

The answer to repealing the 3% provision may be contained in legislation offered by Rep. Kendrick Meek (D-Fla.) and Wally Herger (R-Calif.). Introduced early in the 110th Congress, H.R. 1023 currently features almost 190 co-sponsors. At press time, the legislation has not been scheduled for consideration by the all-powerful House Ways and Means Committee, where all tax and revenue measures are considered. The Committee, however, recently considered legislation on an unrelated matter where the 3% was called into question. The Committee supported proposals to delay for one year the implementation date and request that the U.S. Treasury conduct a study analyzing the costs incurred to state and local governments.

And if things weren’t bad enough, there are some in Congress that support the 3% withholding provision so much that they would like to see it accelerated or attempt to see the 3% increased to perhaps 10%.

PHCC ranks this among its highest legislative priorities and will be dedicating future legislative conferences and fly-ins to repealing this provision. Lake Coulson is vice president, government relations, for the Plumbing-Heating-Cooling Contractors – National Association. He can be reached at 800/533-7694 or at coulson@naphcc.org.