Washington has an uncanny habit of passing laws without fully understanding their contents or grasping their long-term consequences. Think of former Speaker Nancy Pelosi’s oft-played sound bite referring to the health care overhaul, “But we have to pass the bill so that you can find out what is in it, away from the fog of controversy.”
Congress passed a law in 2005 called the Tax Increase Prevention and Reconciliation Act, which contained many positive provisions, including an extension of reduced rates on capital gains and dividends, and a provision making it easier to convert from a traditional IRA to a Roth IRA.
But there was one section that is now just starting to come to light, and it isn’t good.
Section 511 of what is now Public Law 109-222 calls for federal, state and local governments with expenditures of $100 million or more to withhold three percent of all payments for goods and services. This includes payments called for by government contracts, Medicare payments and grants to for-profit entities.
So, imagine your business has submitted an invoice to the city of Tucson for $100. You’ll only be getting $97 back in payment.
Oh, but don’t worry, says the government. That $3 can be applied to your annual tax liability.
This is hardly sound tax policy.
Because of Washington’s clumsy attempt to go after companies and individuals trying to dodge paying taxes, state and local governments have been saddled with a new unfunded mandate while private businesses are facing interruptions to their cash flow. Customers will feel the pinch, too. Without access to three percent of their funds, business will be forced to pass along the costs to consumers.
Honest taxpaying individuals and businesses shouldn’t have to float the government an interest-free loan, and state and local governments shouldn’t have to finance on their own the costs of Washington’s new tax collection strategy.
With the rule set to go into effect on January 1, 2013, there is, however, a solution making its way through Congress.
Congressman Wally Herger (R-Calif.) has introduced H.R. 674, a bill that would repeal the three percent withholding rule. Joining the congressman are over 200 of his colleagues from both parties as cosponsors, including Arizona Congressmen Trent Franks, Paul Gosar, Ben Quayle and David Schweikert.
As Rep. Franks said, “When our nation’s unemployment rate is already 9.2 percent, I cannot stand by and watch struggling Arizona companies go out of business because of a policy that was slipped into Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 without any debate.”
Also weighing in on the debate is Mesa Mayor Scott Smith, who is preparing a resolution in opposition to the rule for introduction at the next League of Cities and Towns conference.
The recent debate over the debt ceiling was just the tip of the iceberg for what is going to be a tough conversation in this country over how to lower tax rates, broaden the tax base and close loopholes without further stalling job creation in this struggling economy.
But forcing state and local governments to take on a new responsibility and taking money out of the pockets of honest businesses is going to do nothing to spark an economic revival. This is one rule that has to go.
Glenn Hamer is the president and CEO of the Arizona Chamber of Commerce