House Votes to Repeal Another Bad Tax Law

While President Obama crisscrosses the country complaining that Congress is not doing enough to create jobs, House Republicans quietly passed our 17th job-related bill of the year. Members of the president's own party even joined us this time, providing bipartisan action on jobs -- in contrast to a White House that only contributes empty, divisive rhetoric. By repealing the ridiculous 3 percent withholding tax requirement, we will remove yet another government-imposed obstacle to economic growth.

Only the federal government could devise a policy as misguided and counterproductive as the 3 percent withholding rule. Under this rule, federal, state and local governments doing business with private contractors were authorized to withhold 3 percent of their payment to these companies based solely on the suspicion that the businesses might somehow evade their full tax obligation. In the real world, individuals are not allowed, for instance, to dock their mechanics 3 percent just in case they might be overcharging. Neither should the government be allowed to penalize contractors and suppliers by withholding full payment on the assumption that these businesses might evade their taxes in the future.

This withholding policy is as damaging as it is unfair. Describing the requirement's effect as "an interest free loan on the backs of many honest taxpayers," the U.S. Chamber of Commerce points out that “the profit margin for many businesses is often less than 3 percent, meaning that the withholding tax will create significant cash flow problems for day-to-day operations as well as draining capital that could be used for job creation and business expansion.”

The tax also creates accounting burdens on cash-strapped local and state governments. In a letter to Congress, a coalition of governors, mayors, state legislatures, comptrollers, treasurers, county executives, and retirement administrators urged the immediate repeal of the policy. These representatives noted that the provision would "cause state and local governments to focus scarce resources on implementation" and that "most entities do not have the resources, capacity or staff to undertake the required withholding and remittance." These officials also cautioned that "state and local governments cannot withstand an increase in the cost of goods and services that will likely result when private sector companies pass along the 3 percent withheld as a cost of doing business.”

America's job creators face enough challenges without the added costs and uncertainty created by the 3 percent withholding requirement. Repealing this flawed, unfair policy is one more example of the commonsense steps Congress can take to get government out of the way of economic growth.