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Ms. SNOWE. Mr. President, I rise to express support for the pending legislation on a critical issue that addresses the burdensome cost of compliance with the Tax Code. H.R. 674 is modeled after bipartisan legislation Senator Brown and I introduced earlier this year to repeal the 3 percent withholding on government contractors that was enacted in 2005.
I thank Senator Brown for his steadfast and persistent leadership on this issue as well as Senators Ayotte, Barrasso, Blunt, Burr, Chambliss, Inhofe, Johanns, Boozman, and Risch who are also cosponsors of the legislation.
The 3 percent withholding provision mandates that Federal, State, and local governments withhold 3 percent of their payments to private contractors, including Medicare provider payments, farm payments, defense contracts and certain grants.
According to the National Federation of Independent Business, ``the 3 percent withholding provision puts both an administrative burden on all parties involved and a strain on the daily operating cash flow of the businesses entering into these contracts.'' This provision would deduct 3 percent from those payments and send the cash to the IRS for what can be considered a downpayment on taxes. The following year, absent any outstanding tax liability, the contractors, or doctors in the case of Medicare, would then get the payment rebated to them. This forces legitimate small businesses who pay their taxes in a timely manner to loan the government 3 percent of a total contract.
The American Medical Association supports repealing the 3 percent withholding because it is an additional tax on physicians who already are facing a 29.5 percent cut in Medicare payments on January 1 of next year. According to the AMA Physician Practice Information Survey, 78 percent of office-based physicians in the United States are in practices of nine physicians and under, with the majority of those physicians being in either solo practice or in practices of between two and four physicians. Withholding 3 percent of Medicare payments for services furnished by physician practices will create a difficult cash flow problem for physician practices as small businesses.
This is another example of good intentions having unintended consequences and originated as a result of very legitimate efforts to address the tax gap--the difference between what is owed in taxes and the amount that the IRS is able to collect.
At first glance, it may seem reasonable to withhold a portion of payments to contractors, until they pay taxes on the earnings. However, the problem with this approach is that it assumes that contractors will not pay their taxes and, regrettably, small businesses suffer as a result of this faulty assumption.
Because this mandate withholds 3 percent of payments to contractors, it is a serious problem for small businesses for whom such a withholding from cash-flow would make bidding on contracts cost prohibitive. As such, this mandate threatens to stifle the economy at a time when we cannot afford any unnecessary obstacles in the road to recovery.
Everyone agrees that Americans should pay their taxes in full and none of us supports tax cheats, yet there are already extensive penalties including monetary and even criminal for tax delinquency. The unfortunate fact is that the 3 percent withholding provision will cost far more to implement than will be collected in tax revenue.
As a senior member of the Senate Finance Committee, I remain committed to exploring alternative means to ensure government contractors are indeed paying their taxes in full while working to mitigate the costs of compliance. On November 1, the Senate passed the Agriculture appropriations bill which included a provision prohibiting agencies from awarding contracts to companies with unpaid Federal taxes.
Additionally, that legislation barred any contract over $5 million from being awarded if a company cannot certify it has paid its taxes in the last 3 years. Unfortunately, the Obama administration has criticized this provision as having ``unintended consequences'' and that the bill as written would hurt contracting decisions. I believe the legislation should have gone even further and forced all contractors to certify that their taxes are up to date. The bottom line is the Federal Government should not be contracting with those who fail to meet their tax obligations and it is imperative this administration develop a coordinated process to not only punish fraudulent contractors but ensure tax compliance before contracts are awarded.
That said, our country is in no place to stifle already anemic economic recovery and disappointing job growth numbers that have plagued the Nation for 3 years now. According to data released Friday by Bureau of Labor Statistics, the unemployment rate remains persistently high at 9 percent.
About 45 percent of the unemployed have been out of work for at least 6 months--a level previously unseen in the six decades since World War II. At a time when 14 million Americans are still unemployed, and have been so for the longest period since record keeping began in 1948, our government should be taking every possible step to ease the burden on job creators. We need to offer the American people solutions that help grow jobs, not provisions that prevent it.
Compliance with this law will impose billions of dollars of cost on both the public and private sectors, with a disproportionate impact on small businesses. These compliance costs will far exceed projected tax collections.
For instance, just one Federal agency, the Department of Defense, estimated that it would cost over $17 billion in the first 5 years to comply, and the revenue estimate in 2005 projected that only $6.977 billion would be collected over a 10 year window.
Even if that DOD estimate is inflated, as some charge, the Congressional Budget Office projects costs of $12 billion just to implement this provision at the Federal level. There are similar costs imposed across all of the Nation's State and local governments, making this provision simply an unfunded mandate on State and local governments. This is a case of spending a dollar to collect a dime, which is counterproductive for addressing the Nation's deficits.
As ranking member of the Senate Committee on Small Business, I have heard from many businesses across the country that the 3 percent withholding amount will exceed their profit on a given contract and will prevent them from being able to make payroll, forcing them to borrow from banks just to pay their employees.
This is not the way to encourage jobs and business growth but rather the way to stifle it. This 3 percent withholding provision would increase the tax and regulatory burdens on our businesses--precisely the wrong policy potion for these troubled times.
Given the record deficits and budgetary crisis in this country, it is imperative that the Congress find funds to offset the repeal provision. The President and the House of Representatives both agreed that a proper way to pay for repeal would be to retract a poorly drafted provision from the new health care law--a provision that would have added people who do not meet the income requirements on to the already-strained Medicaid Program which provides health care to the indigent.
As a strong supporter of Medicaid, I know it is important to keep the program narrowly targeted at those populations most in need, and if doing so in this case allows us to repeal the damaging 3 percent withholding rule, then so much the better.
At a time when the American people are extremely frustrated with the partisan gridlock and Congress' inability to pass meaningful legislation, this bipartisan bill would provide small businesses with much needed certainty and relief.
I yield the floor.
I suggest the absence of a quorum.
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