In May of 2006, President Bush signed into law the Tax Increase
Prevention and Reconciliation Act (TIPRA) (Public Law No. 109-222).
The measure was a combination of small tax provisions, including
extension of capital gains tax rates, increased expensing
provisions for small businesses and some alternative minimum tax
relief. To offset these revenue-negative provisions it also
contained sixteen "revenue offset" provisions to make the bill
revenue neutral.
While most of the provisions of the bill were debated in both
the House and Senate, there was a provision that emerged from the
conference committee that had never been part of the original bills
and never discussed in hearings on the chamber floors. Section 511
mandates that federal, state, and local governments withhold 3
percent of their payments for goods and services (the "government
withholding regime") starting in 2013. Assumptions are that it was
added into the bill to help reconcile the bill and make it "revenue
neutral."
Implementation was delayed until 2013 largely due to the fear
that many contractors would increase bids on projects to account
for the delay in payment, increasing the overall cost of projects
dramatically. An increase in project costs on a local level could
have been devastating to communities that are struggling to finance
projects while dealing with deep budget cuts.
Because the profit margin for many businesses working with local
and state government is often less than three percent, the
withholding tax would have created significant cash flow problems
for day-to-day operations in addition to reducing capital that
could be invested in job creation and business expansion. Many
planning, architecture, landscape architecture, and engineering
firms work extensively with government agencies and would have been
negatively affected by this change.
This provision was repealed as a part of a larger bill (HR 674)
that contained several elements of President Obama's jobs bill.
Introduced by Reps. Wally Herger (R-Cal.) and Earl Blumenauer
(D-Ore.), the bill was a bipartisan effort with 269 co-sponsors. It
was passed unanimously. The Senate previously approved the bill on
a 94-to-1 vote.
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