[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




     FULL COMMITTEE HEARING ON THE NEW HIDDEN TAX ON SMALL BUSINESS

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 22, 2007

                               __________

                          Serial Number 110-10

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house










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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


JUANITA MILLENDER-McDONALD,          STEVE CHABOT, Ohio, Ranking Member
California                           ROSCOE BARTLETT, Maryland
WILLIAM JEFFERSON, Louisiana         SAM GRAVES, Missouri
HEATH SHULER, North Carolina         TODD AKIN, Missouri
CHARLIE GONZALEZ, Texas              BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington              MARILYN MUSGRAVE, Colorado
RAUL GRIJALVA, Arizona               STEVE KING, Iowa
MICHAEL MICHAUD, Maine               JEFF FORTENBERRY, Nebraska
MELISSA BEAN, Illinois               LYNN WESTMORELAND, Georgia
HENRY CUELLAR, Texas                 LOUIE GOHMERT, Texas
DAN LIPINSKI, Illinois               DEAN HELLER, Nevada
GWEN MOORE, Wisconsin                DAVID DAVIS, Tennessee
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
BRUCE BRALEY, Iowa                   VERN BUCHANAN, Florida
YVETTE CLARKE, New York              JIM JORDAN, Ohio
BRAD ELLSWORTH, Indiana
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                  Michael Day, Majority Staff Director
                 Adam Minehardt, Deputy Staff Director
                      Tim Slattery, Chief Counsel
               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


WILLIAM JEFFERSON, Louisiana         DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas                 ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin                SAM GRAVES, Missouri
YVETTE CLARKE, New York              TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma


                                  (ii)




















           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


WILLIAM JEFFERSON, Louisiana         LYNN WESTMORELAND, Georgia, 
RICK LARSEN, Washington              Ranking
DAN LIPINSKI, Illinois               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               STEVE KING, Iowa
GWEN MOORE, Wisconsin                MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania             VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


JUANITA MILLENDER-McDONALD,          LOUIE GOHMERT, Texas, Ranking
California                           LYNN WESTMORELAND, Georgia
CHARLIE GONZALEZ, Texas
RAUL GRIJALVA, Arizona

                                 (iii)























                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Iannelli, Vincent, Associated General Contractors................     4
Deel, Daryl, American Trucking Associations......................     5
Whitman, Lamar, Computing Technology Industry Association........     7
Kahn, Chip, American Federation of Hospitals.....................     9
Coleman, Lonnie, Coleman Spohn Corporation.......................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    30
Chabot, Hon. Steve...............................................    32
Altmire, Hon. Jason..............................................    34
Iannelli, Vincent, Associated General Contractors................    35
Deel, Daryl, American Trucking Associations......................    43
Whitman, Lamar, Computing Technology Industry Association........    46
Kahn, Chip, American Federation of Hospitals.....................    55
Coleman, Lonnie, Coleman Spohn Corporation.......................    61

Statements for the Record:
Associated Builders and Contractors..............................    67
American Congress on Surveying and Mapping.......................    75
Aerospace Industries Association.................................    76
American Farm Bureau Federation..................................    78
American Moving and Storage Association..........................    80
American Road & Transportation Builders Association..............    82
American Supply Association......................................    84
American Society of Civil Engineers..............................    86
Construction Financial Management Association....................    88
Construction Management Association of America...................    92
The Coalition for Government Procurement.........................    94
Contract Services Association....................................    96
Donald Alexander, Akin Gump Strauss Hauer & Feld LLP.............    98
Electronic Industries Alliance...................................   100
Government Withholding Relief Coalition..........................   105
Government Finance Officers Association, et al...................   109
National Electrical Contractors Association......................   111
Small Business & Entrepreneurship Council........................   114

                                  (v)













 
     FULL COMITTEE HEARING ON THE NEW HIDDEN TAX ON SMALL BUSINESS

                              ----------                              


                        THURSDAY, MARCH 22, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Shuler, Cuellar, 
Altmire, Braley, Ellsworth, Chabot, Musgrave, Westmoreland, 
Fallin, Buchanan and Jordan.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I now call to order 
this hearing to examine the impact of a three percent 
withholding requirement on all government payments.
    Today's hearing focuses on what might seem to be a minor 
change in tax law, but will have a huge effect on small 
businesses across this country. We will discuss the potential 
problems of a provision passed last year that will require the 
government to withhold three percent on many government 
payments.
    While the withholding requirement is not scheduled to 
become effective until 2011, it is important to understand the 
problems now. This change goes far beyond those who do business 
with the federal government. Farmers receiving payments from 
the USDA, health care providers who receive Medicare 
reimbursement, as well as the thousands of small businesses who 
perform contract work for the federal government will all be 
hit. This money will be withheld regardless of what you 
actually owe in taxes.
    This could be an enormous burden for small businesses. 
Taking away three percent of revenues can mean the difference 
between meeting payroll, expanding a company or buying needed 
equipment. It will reduce their ability to compete against 
their corporate counterparts.
    For small government contractors, the results could be 
severe. When you consider that small firms are continuing to be 
squeezed out of the federal marketplace, the last thing 
Congress should be doing is creating another obstacle to 
success. Small firms, which often have fewer resources, may be 
unable to afford to stay in the market. If businesses leave the 
federal marketplace, there will be less competition, which 
could lead to higher prices, costing valuable taxpayers' 
dollars.
    The change will also have a negative impact on the health 
care industry. The sheer volume of transactions affected by 
this change creates a huge administrative burden. Hospitals and 
small business health care providers conduct millions of 
transactions that will be subject to withholding.
    I believe the intent of this provision was a good one. 
Right now there is a $350 billion tax debt. However, I question 
whether this change will really get at that problem. Most of 
the revenues generated by this provision do not come from 
collecting taxes, but from a budget gimmick. It simply moves up 
the collection of money that will have come in the next year.
    We must consider the hidden costs of this legislation. We 
should not increase the cost of running a business by requiring 
an interest free loan to the government. It seems to me that 
the most logical step is to repeal the provision. There are 
better ways to crack down on those who are not paying their 
taxes without creating a hardship on small businesses.
    I appreciate the witnesses coming here today to talk about 
their concerns, and I look forward to today's discussion.
    And now I will recognize the Ranking Member, Mr. Chabot.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you very much, Madam Chairwoman, and 
thank you for holding this important hearing to discuss, as you 
mentioned, Section 511 of the Tax Increase Prevention and 
Reconciliation Act of 2005, known as TIPRA.
    I find it truly ironic that legislation that was called the 
Tax Increase Prevention and Reconciliation Act, which provides 
for lower taxes on capital gains and dividends and that 
generally helps small business owners, also contains a 
provision added at the 11th hour during a House-Senate 
conference committee that will raise taxes on those same small 
businesses if Congress fails to take action.
    Of course, we hope that Congress will take action.
    Section 511 of the Act, scheduled to take effect in 2011, 
will require federal, state, and local governments with an 
annual procurement budget of at least $100 million to withhold 
three percent from all payments for goods and services as a 
guard against possible business tax evasion, justification that 
I find particularly offensive.
    Section 511 will affect goods and services under government 
contracts, as well as payments to any person for services or 
products provided to a government entity, such as Medicare 
payments or certain grants. This provision is based on revenue 
from government payments and is unrelated to a company's 
taxable income or tax liability.
    As I mentioned earlier, it is particularly troubling to me 
that Section 511 was inserted in the Tax Increase Prevention 
and Reconciliation Act of 2005 during the House-Senate 
conference without open debate on the merits. A provision that 
will likely have this type of impact on small businesses, as 
well as state and local governments and the private sector, 
should have been fully considered in both Houses of Congress 
with inputs from all sides.
    At a time when we are trying to encourage the federal 
government to do more business with small businesses, Section 
511 is exactly the wrong message to send. Small businesses 
typically work with very small margins, and three percent 
withheld from any payment affects its operating capital and 
could make the different between its ability to submit a bid or 
not.
    Furthermore, companies of all sizes that do business with 
government will likely have to increase prices to account for 
this additional burden. The impact of Section 511 will likely 
be enormous and far reaching. From the cost of construction 
projects to taxpayers, which would likely increase, to the 
already low Medicare reimbursement payments to physicians that 
will likely decrease, which could cause physicians to stop 
accepting new Medicare patients.
    Some companies may be forced to pass some of the 
withholding amount down to subcontractors. This can be 
especially harmful to small businesses down the supply chain. 
According to the Congressional Budget Office and the Joint 
Committee on Taxation, Section 511 amounts to an 
intergovernmental unfunded mandate and would be extremely 
expensive to implement.
    In many cases, governments and the private sector would 
have to adopt new accounting and financial control measures and 
perhaps additional personnel to track these payments. In short, 
Section 511 hurts honest taxpaying small businesses without 
providing any additional enforcement provisions to improve tax 
compliance.
    Section 511 of TIPRA is bad law and bad tax policy. I want 
to again thank the Chairwoman for holding this hearing to 
expose the damaging effects this provision will have on small 
businesses should Congress fail to take action in the next 
several years to prevent it, or should there be an attempt to 
expedite Section 511's implementation, as happened last year. 
We need to be looking at ways to foster growth and productivity 
in the small business sector, not penalize everybody for the 
actions of a few.
    Madam Chairwoman, thank you again for holding this hearing. 
I look forward to hearing from our distinguished panel and 
working with you to address this important issue, and I look 
forward to introduction, if possible, Mr. Coleman who is from 
the great State of Ohio. He does not have the good fortune to 
be from Cincinnati. He is from Cleveland, but close enough. 
[Laughter.]
    Mr. Chabot. I yield back.
    Chairwoman Velazquez. Thank you. Thank you.
    Our first witness is a constituent from New York, the great 
State of New York, Vincent Iannelli. He is the President of 
Iannelli Construction Company, Inc., and a member of the 
General Building Contractors of New York State, Associated 
General Contractors Chapter. Associated General Contractors of 
America represents over 32,000 firms throughout the country.
    Mr. Iannelli, you will have five minutes to make your 
presentation, and I want to excuse myself. I have to go before 
Natural Resources Committee to testify on a bill that I am the 
lead sponsor. So I will ask for you to excuse me, but Mr. 
Shuler will be on the Chair, and I will be coming back as soon 
as I finish.
    Mr. Shuler. [presiding] Thank you, and you may start.

STATEMENT OF VINCENT IANNELLI, PRESIDENT, IANNELLI CONSTRUCTION 
 COMPANY, INC. ON BEHALF OF ASSOCIATED GENERAL CONTRACTORS OF 
                            AMERICA

    Mr. Iannelli. Thank you, Chairwoman Velazquez and Ranking 
Member Chabot, for this opportunity to testify on the new three 
percent withholding law.
    I am testifying on behalf of the Associated General 
Contractors of America, a national trade association 
representing more than 32,000 companies. I am Vincent Iannelli, 
President of Iannelli construction and a member of the General 
Building Contractors of New York State, an AGC chapter.
    My father started our company in 1958, and now my brother 
Thomas and I are running it. My daughter Carla started working 
with us two years ago.
    Iannelli Construction is a family business. We are also 99 
percent public works.
    Small business is big in construction. In 2005, 91 percent 
of construction establishments had fewer than 20 employees. 
Only one percent had 100 or more. According to the 2006 
construction industry annual financial survey, earnings after 
taxes in the most recent fiscal year averaged 2.1 percent, up 
from 1.6 percent in 2005.
    Today, Iannelli Construction works 99 percent on school 
construction. We employ six full-time employees in the office 
and ten to 20 in the field, depending on how much work we have. 
We are 100 percent union, working mostly with the locals from 
the Carpenters Union and the Mason Tenders Unions.
    All of my public projects have retainage. The public owners 
hold back from five to ten percent on each progress payment 
until the project has been substantially complete.
    In addition, some public owners hold out an additional five 
percent of the project for closeout and punch list. It has 
taken me years sometimes to receive final payment after the 
contract has been completed.
    Because these are public projects, all of our jobs are 
bonded. Having bonds on projects insures the taxpayers that the 
jobs will be completed at no additional cost to the public. The 
project must be completed for the price and in the time 
negotiated under the contract.
    The construction contractor is responsible for purchasing 
the bond, and if something happens to the company, the bonding 
company liquidates the contractor's assets to complete the 
project. The taxpayer is protected.
    Contractors must purchase performance and payment bonds for 
government projects. The performance bond insures that payroll 
taxes will be paid on behalf of the employees working at the 
site. If the government determines that payroll taxes have not 
been properly withheld and remitted, then the government can 
ask the bond provider to fill in the gap. Under the bond 
everyone is protected.
    Now the federal government has added an additional layer by 
requiring three percent holding on payments for goods and 
services from every level of government, federal, state, and 
local. This new requirement plus the retainage and closeout 
costs could add up to 15 percent of every progress payment.
    This kind of hit to my cash flow also makes it more costly 
for me to purchase the bonds necessary. Many companies who 
provide the bonds study my books in detail before offering 
coverage. Based on past performances, the ability to perform 
the work for which I bid and my cash flow assurity gives 
Iannelli Construction a bond rating which governs the price of 
the bonds and how much bonding coverage I can receive.
    This is just one of the reasons why cash flow is so 
important. Another is my ability to pay my suppliers, 
subcontractors and service providers. Some suppliers ask for 
payment up front, which means I am paying for things before 
being reimbursed by the government.
    What is frustrating is the government is penalizing good 
contractors for paying their taxes and paying their payroll 
taxes in a timely manner. There should be a better way to do 
this.
    Every couple of years we have to prequalify for certain 
government agencies that we do work for, and one of the 
questions during the process is if we pay our taxes. The agency 
looks into this and someone's tax returns from the previous two 
or three years. If you cannot come up with that, you are not 
qualified to bid on these jobs. This shuts people down if after 
a while they aren't paying their taxes.
    The majority of AGC contractors work on some kind of 
government contract every year, and this three percent 
withholding will have a large impact on the construction 
industry.
    Again, thank you for this opportunity to testify today on 
behalf of the AGC, and I look forward to your questions.
    Mr. Shuler. Mr. Iannelli, thank you so much for your 
testimony and comments.
    [The prepared statement of Mr. Iannelli may be found in the 
Appendix on page 35.]
    At this time I'd like to introduce Mr. Daryl Deel, the 
president of three small business trucking companies and comes 
on behalf of the American Trucking Association, ATA. Mr. Dill 
is the Vice Chairman of the ATA Tax Policy Committee.
    ATA represents carriers of government agencies, and I thank 
you for your testimony.

 STATEMENT OF DARYL DEEL, VICE CHAIRMAN, TAX POLICY COMMITTEE, 
                 AMERICAN TRUCKING ASSOCIATION

    Mr. Deel. Thank you.
    And good morning. Again, my name is Daryl Deel. I am a 
certified public accountant by training and now I am in the 
trucking industry, and I do own three small trucking companies.
    I am here today representing the American Trucking 
Association, or better known as ATA, and we certainly 
appreciate the opportunity to be here today.
    My trucking company specializes in transporting highly 
specialized security sensitive cargo for the Department of 
Defense and the Department of Energy. As a member of ATA, I am 
currently the Vice Chairman of the ATA Tax Policy Committee, 
and for three years prior to that I chaired the Government 
Traffic Policy Committee, which is comprised of motor carriers 
and brokers which provide contract services to haul government 
freight.
    ATA represents the motor carriers who serve government 
agencies with the best freight logistics support in the world, 
and it takes a lot of money and expertise to provide that level 
of service. We take immense pride in the fact that we support 
public missions. We are particularly proud to be an 
indispensable link in the defense supply chain that sustains 
America's war fighters domestically and throughout the world.
    Like most businesses and Mr. Iannelli's business, we expect 
customers to pay with 30 days or net 30. When a customer has a 
good track record of payment, we give them the best rates. When 
the government begins withholding the three percent, we are not 
going to see that money returned to us for much longer than 30 
days.
    Depending on the state of the economy, the motor carrier 
industry's net profit margins range from one half of one 
percent to five percent of revenues, for an average net profit 
of about three percent. Therefore, when the government 
customers start withholding the three percent of the freight 
bill that they owe the carriers, trucking companies may be 
compelled to raise rates just to stay whole.
    Otherwise, all of that profit margin, that three percent 
profit margin becomes unavailable until we file our tax returns 
and then maybe get our refund a year later.
    And then when the economy is down and suppresses profit 
margins for our industry, the three percent withholding will 
more than devour all of the net profit for our industry. This 
is like a loan to the government. Most small business will not 
be able to withstand the negative cash flow impact and could 
eventually go bankrupt.
    A large company with mostly commercial customers and does 
business with governmental agencies, they are likely to be able 
to absorb that three percent by just reducing their quarterly 
estimated tax payments. So they are paying it one way or the 
other way.
    But a small company, on the other hand, that does a lot of 
business with government customers could suffer that 100 
percent withholding of their profit margin and, again, would 
have to wait until they file their tax returns and get a refund 
the following year.
    Worse yet, that three percent withholding could bite into 
the cash needed to provide the direct services to the customer. 
They have to pay their contractors or their employees, and 
their fuel bill, and all of those operating expenses. So the 
negative cash flow impact might force a small company, small 
business, to either raise its rates, but it may be difficult to 
do that in a competitive environment where a larger company can 
withstand the cash flow impact of the three percent, and it may 
make small business not competitive in vying for government 
business.
    So it could force the small company to consider leaving 
government service and increasing their business with 
commercial shippers, those shippers that pay within 30 days, 
the full 100 percent of the freight bill.
    I do have a simple chart that demonstrates the tax and cash 
flow impact of a large business versus a small business for a 
motor carrier. With your pleasure, I will submit that for 
additional testimony.
    For these reasons, I am convinced that if the three percent 
withholding is actually implemented that my three small 
companies may be compelled to raise rates or to exit providing 
service to government agencies. And I believe this is the 
opposite to what Congress intended when this new withholding 
tax or the bill was enacted.
    For these reasons, the motor carriers of the American 
Trucking Association urge the members of this honored panel to 
support H.R. 1023.
    And thank you for the opportunity to be here today. I look 
forward to your questions.
    Mr. Chabot. Mr. Chairman, I would just move that the chart 
that Mr. Deel referred to be admitted to the record, without 
objection.
    Mr. Shuler. Without objection.
    Mr. Chabot. Thank you very much.
    [The prepared statement of Mr. Deel and chart may be found 
in the Appendix on page 43.]
    Mr. Chabot. Mr. Deel, thank you so much for your testimony.
    At this time I would like to introduce Lamar Whitman, who 
is a public policy manager for Computing Technology Industry 
Association, CompTIA. CompTIA has more than 2,000 members in 
the information technology industry. This organization is 
driven by helping individuals obtain skills necessary to 
succeed in the IT industry.
    Mr. Whitman, thank you so much for your testimony.

 STATEMENT OF LAMAR WHITMAN, PUBLIC POLICY MANAGER, COMPUTING 
                TECHNOLOGY INDUSTRY ASSOCIATION

    Mr. Whitman. Thank you very much for the invitation.
    Good morning, Mr. Shuler and Ranking Member Chabot and also 
distinguished members of the Committee. My name is Lamar 
Whitman. I am appearing today on behalf of the Computing 
Technology Industry Association, CompTIA, representing 20,000 
member companies.
    I want to thank Chairwoman Velazquez and members of the 
Committee for holding this important meeting concerning the 
effects of this impending three percent withholding. While this 
requirement does not distinguish between government payments 
made to either large corporations or small businesses, our 
comments today will concentrate on the effects of this 
provision on our small business members.
    The typical small business does not have an IT department, 
but relies upon the services of an important segment of the 
computer industry referred to as value added resellers, or 
VARs. VARs are small system integrators that design, install, 
and maintain computer systems and networks for other small 
businesses. There are an estimated 32,000 VARs, most of which 
are small businesses themselves, sell approximately $43 billion 
worth of computer hardware, software, and services annually. 
This means that about one third of the computer hardware sold 
in the United States is sold by a VAR.
    A 2006 government VAR survey found that about half of the 
VAR's gross revenue derived from the public sector, which would 
put this somewhere in the magnitude of $20 billion annually; of 
this, about 37 percent is from sales to federal government; 35 
percent sales to state and local governments; and 28 percent 
goes to educational institutions.
    This three percent withholding requirement is unnecessary 
to promote tax compliance and will unfairly penalize compliant 
small businesses. First, we must note the unprecedented nature 
of this new withholding requirement. Historically, prepayments 
of tax had borne some direct relationship to a taxpayer's 
estimated tax liability. However, this new three percent 
withholding departs from the traditional scheme of federal tax 
payments because it bears no relation to the tax liability.
    Indeed, a VAR working under a government contract with a 
slim profit margin could experience a net loss for the year, 
but it would still be subject to the three percent withholding.
    With keen competition, VARs operate on a very small profit 
margin, often three to six percent and sometimes much less. I 
provided two examples in the written testimony. In both 
situations, assume the business receives $5 million in 
government payments with $150,000 being withheld for this three 
percent payment. With a six percent net profit margin, as shown 
in the first example, the federal tax liability is about 
$100,000. However, $150,000 has been withheld from payments to 
that person. So, therefore, they have lost the benefit of 
$50,000 in operating capital.
    The three percent withholding becomes even more absurd when 
applied to a company with a four percent net profit margin, as 
shown in the second example. In that scenario, the business 
would be deprived of about $90,000 of working capital.
    This three percent withhold provision has a regressive 
effect, reserving its greatest penalty for those businesses 
with the lowest net income, typically small businesses.
    In addition to our cash flow concerns, we see a number of 
other adverse issues. In subcontracting situations, this three 
percent withholding will inevitably be passed down from the 
prime to the subcontractor. Without this operating income, 
subcontractors will be forced to use credit, incurring interest 
costs, and this will, in turn, increase the cost of goods and 
services to government purchasers.
    We also believe this new requirement will make it much more 
difficult for government agencies to meet their small business 
contracting goals, something that I know that this committee is 
very concerned with.
    Further, the three percent withholding on pass-through 
entities, such as Subchapter S corporations, partnerships, 
joint ventures, whatever, will need to be allocated out to the 
shareholders for an S corporation or to the partners in the 
case of a partnership. This will further increase the 
complexity of return preparation far beyond that of the 
contracting entities alone.
    The purported justification for instituting this three 
percent withholding was that some recipients of government 
payments were not reporting and paying their federal income 
tax. If, in fact, this is the problem, we believe the proper 
and least harmful course of action is to require government 
payers to report such payments. The goal here should be to 
promulgate effective tax compliance measures, not punish all 
government contractors indiscriminately.
    CompTIA and CompTIA's members were fully supportive of 
efforts to promote tax compliance. However, we object to 
unnecessary and harmful tactics, such as this three percent 
withholding. This new requirement is unfair to small 
businesses, especially of ours, and will force more and more 
small businesses out of the competition for federal government 
procurement opportunities.
    Thank you very much, and I will be pleased to answer 
questions later on.
    [The prepared statement of Mr. Whitman may be found in the 
Appendix on page 46.]
    Mr. Shuler. Mr. Whitman, thank you for your testimony.
    At this time I will introduce Charles Kahn, who is the 
President of the Federation of American Hospitals. FAH is the 
national representative of investor owned or managed community 
hospitals and health care systems throughout the United States.
    Mr. Kahn, thank you for being here today, and we are 
looking forward to hearing your testimony.

 STATEMENT OF CHARLES KAHN, PRESIDENT, FEDERATION OF AMERICAN 
                           HOSPITALS

    Mr. Kahn. Thank you, Mr. Chairman.
    And I appreciate the committee holding this hearing today. 
It is a pleasure to appear before the committee on behalf of 
the Federation of American Hospitals.
    We represent approximately 20 percent of the hospitals 
across the country that serve our communities. Our members also 
pay their fair share of federal, state, and local taxes.
    I would like to make four points today. One, the three 
percent withhold is unfair because it penalizes all because of 
the misdeeds of a few.
    Two, the federal health care agency who will implement the 
three percent withhold for Medicare, as well as the Medicare 
claims payment system itself are ill-suited to adapt to this 
kind of requirement.
    Three, the health care providers will be harmed by the 
three percent withhold and are likely to suffer unanticipated 
problems that the framers of the law could not have 
anticipated.
    And finally, that the GAO report that defines the problems 
points to a solution other than the three percent withhold, the 
federal payment levy program. We need to give this program a 
chance to work before we penalize everyone doing business with 
the federal government.
    First, let me start off by talking about the providers 
themselves. Most health care providers are paid by Medicare 
program on a per claim basis, a per service basis. Under Part A 
and Part B, hundreds of millions of claims are processed each 
year, and a new process will need to be implemented to capture 
the three percent withhold for tax paying health care 
businesses.
    The tax revenue to be generated from three percent withhold 
is smaller than most people think after the first year. Yet the 
implementation costs to the entire federal government, 
particularly to the Medicare program will be enormous and 
continue into the future.
    The Medicare program currently uses some 40 private 
contractors to process Medicare claims. This means the federal 
government will provide significant oversight of its 
contractors which have different from processing systems to 
insure that the three percent withhold is correctly collected.
    Another problem involves Medicare claims themselves that 
are filed, but frequently need to be amended or refiled. This 
common practice usually results in a payment adjustment which 
will mean some type of reconciliation on the tax withholding 
side will be necessary. It is unclear how this will be 
accomplished.
    Third, the health care provider community will be unduly 
burdened by the three percent withholding and are likely to 
suffer unanticipated problems. Medicare providers already 
experience slim operating margins, in large part due to the 
insufficient levels of government insurance payments. In 2007, 
hospitals are expected to experience a negative operating 
margin of 5.4 percent on their Medicare business alone. 
Withholding three percent of Medicare payments off the top, 
regardless of the taxpayer's situation, will exacerbate this 
problem and create additional cash flow concerns, especially 
for start-up or small businesses that need to maximize cash 
flow to survive.
    The administrative burden on the health care industry will 
be similar to burdens the federal government faces and will 
create an expense for businesses that will be unfunded, of 
course, by the government itself.
    The GAO reports focus on the federal payment levy program 
as a solution, which targets delinquent taxpayers by collecting 
what they owe from current government payments. The reports 
make clear that the implementation challenges remain for the 
levy program, and that increased participation by federal 
agencies is essential for the program to reach its full 
potential.
    HHS does not participate in the levy program, but clearly 
should be able to capture much of the money that is not being 
paid in taxes by this program. Congress should consider the GAO 
recommendations on this program and how to improve it and take 
steps to insure greater participation by the federal agencies 
as a solution to this problem.
    So let me reiterate. The Medicare program has millions of 
claims that are processed for those who are serving Medicare 
beneficiaries every day. To take three percent from those 
claims obviously will be extremely complicated and difficult to 
implement, and will have effects on those who are providing 
those services.
    There has got to be a better way, and we believe in the GAO 
report their recommendations for a better way to solve this 
real problem that our taxing system faces.
    Thank you.
    [The prepared statement of Mr. Kahn may be found in the 
Appendix on page 55.]
    Mr. Shuler. Mr. Kahn, thank you.
    I will yield to Ranking Member Chabot for the introduction 
of Mr. Coleman.
    Mr. Chabot. I thank the gentleman very much for yielding.
    It is my pleasure to introduce, as I mentioned before, a 
fellow Ohioan, Lonnie Coleman who is President and CEO of 
Coleman-Spohn in Cleveland, Ohio.
    Founded in 1994, Coleman-Spohn Corporation formed as a 
result of a merger between a residential heating firm and a 
state-of-the-art mechanical engineering company. Today Coleman-
Spohn is a full service mechanical contractor whose clients are 
some of Cleveland's most noted public and private institutions.
    Lonnie Coleman has received the Small Business 
Administration's Award of Excellence and was recognized as its 
prime contractor of the year. Coleman- Spohn has been honored 
as the Ohio Governor's Minority Business of the Year, the 
Environmental Protection Agency's National Minority Contractor 
of the Year, and the City of Cleveland's Construction Firm of 
the Year.
    I am pleased to welcome to the hearing, as I said, Mr. 
Lonnie Coleman, and we thank you very much for your testimony 
here this morning, Mr. Coleman.

STATEMENT OF LONNIE COLEMAN, PRESIDENT AND CEO, COLEMAN-SPOHN, 
 ON BEHALF OF THE MECHANICAL CONTRACTORS ASSOCIATION OF AMERICA

    Mr. Coleman. Thank you, Representative Shuler.
    You have taken the first part of my speech away.
    [Laughter.]
    Mr. Coleman. Thank you very much.
    Good morning to Ms. Velazquez, who has left, and Mr. Shuler 
and the Ranking Member Chabot and the members of the Committee. 
Thank you for inviting me here today.
    My company performs general mechanical and facilities 
management contracts as both a prime contractor and a specialty 
contractor on federal, state, and local projects throughout 
Ohio and in several markets nationwide. And as you have heard 
in my introduction from Representative Shuler, we have had some 
success on the small business level thanks to many of the 
things that the Small Business Committee and Congress have done 
in aiding and assisting small and minority businesses 
throughout our country.
    I am here today representing the Mechanical Contractors 
Association of America, a nationwide specialty construction 
employer trade association. I am also an officer of the MTA, 
serving this year as the Senior Vice President and Treasurer.
    A little bit about MCAA. MCAA's 2,300 member companies 
install, maintain and service all types of mechanical systems. 
The systems range from residential plumbing and heating and air 
conditioning systems to more sophisticated piping systems found 
in the commercial industrial markets, such as nuclear power 
facilities, clean rooms, data centers, and refineries of all 
types.
    Today I am also privileged to represent five other of our 
sister associations, allied in an ongoing legislative campaign 
for quality construction. These groups are the Sheet Metal and 
Air Conditioning Contractors National Association, the National 
Electrical Contractors Association, the International Council 
of Employers of Bricklayers and Allied Crafts, the Finishing 
Contractors Association, the Association of Union Constructors.
    Of these groups, according to the Bureau of Labor 
Statistics figures, our group of specialty construction 
employers represents the vast majority of industry employment 
in our industry and well over 64 percent. In addition, many of 
our groups participate in two wider coalitions: the 
Construction Organizations for a Sensible Taxation, the 
Government Withholding Relief Coalition, both of which are 
adamantly opposed to the three percent withholding provisions 
of the Tax Reconciliation Act.
    Now, what distinguishes our campaign for quality 
construction specialty groups is that we employ highly skilled 
technicians for field construction under local, multi-employer 
collective bargaining agreements with local building trades 
unions. Our bargaining agreements come with high value wages, 
health and welfare, and pension trust fund obligations for our 
employees that require ready cash flow and prompt and reliable 
payments.
    Moreover, the discipline of operating under collective 
bargaining agreements prevents misclassification of the workers 
as independent contractors rather than employees. As we all 
know, in the construction industry, misclassification is an 
area of high abuse and tax avoidance.
    Now, we realize that there is a problem here that needs 
fixing, but at the same time, we feel the three percent 
withholding slated for public contract payments is a bad idea 
and is entirely contrary to the small and minority business 
development goals of your Committee. This Committee is about 
helping, not hindering.
    So we ask that you support the repeal bill H.R. 1023 co-
sponsored by Ways and Means Committee members, Representatives 
Herger and me.
    We also ask that the repeal is done quickly to avoid any 
further efforts taken to accelerate the effective date of the 
measure for misjudged budget gains and offsets.
    Put plainly, fiscal enforcement policy and sound 
procurement policies do not and should not be mixed. To be 
sure, small and minority owned business enterprises, as well as 
all other responsible firms should not have to compete against 
firms that have the unfair competitive advantage of undetected 
tax avoidance. Burdening tax compliant firms with added 
withholding to encourage tax payments by those otherwise 
inclined to cheat we feel is just not fair.
    And I will tell you our campaign for quality construction 
is squarely in favor of closing the tax gap. The taxpayers, 
public agencies, and our industry benefit by fair and robust 
competition among quality firms that are responsible in all 
aspects of their businesses. So if stopping tax avoidance by 
public agencies, goods and services providers is the target, 
then there are more specific tools to achieve that goal, such 
as the contract eligibility process can be tightened up so that 
successful bidders or offerors are not awarded contracts unless 
they demonstrate, prove and certify tax compliance. In this way 
any competitive advantage of tax cheaters id eliminated. The 
agency gets quality work by qualified firms, and the added 
financing and administrative costs of the three percent 
withholding is avoided.
    The U.S. Congress has passed two prompt payment laws 
recognizing that prompt and fair payment terms are the best way 
to administer public contracts and to avoid all the extra costs 
and delays that result from less sufficient contract 
administrated practices. It really does matter how well firms 
are paid and how fairly contracts are administered. Time and 
again, it proves out that the best projects are the ones that 
are the most competently administered. And all of that matters 
even more for small and minority business enterprises whose 
margins are thinner and cannot carry the cost of public 
contract misadministration the way larger firms can.
    And I should point out what makes this issue even more 
problematic is the outdated and unfair practice of withholding 
five to ten percent retainage from the monthly invoice of 
public and private construction contracts without any regard to 
performance, as my colleagues have stated.
    As a second tier or lower contractor, which many of my 
group are, the wait for delays of invoice processing and 
payment for only 90 percent of what you put out the previous 
month can be very difficult for small, small disadvantaged, and 
small minority businesses.
    Now, on top of that, the Tax Reconciliation Act would add 
an additional three percent deduction even though we have 
always paid our taxes on time and our performances have been 
entirely up to par.
    Members of the Committee, it is a fact that construction 
projects are very complex and risky business propositions. 
Profit margins are thin. Risks are high, and the competition is 
very competitive, and the industry, even with this complexity, 
is relatively easy to enter, which makes it an ideal market for 
small business.
    So the question becomes: who pays for the cost of this 
added three percent? Is it the taxpayer? Is it the small or 
minority owned business that has to close up shop because it 
can't afford the three percent delay in payment?
    Ultimately, as taxpayers, we all pay. We will pay with 
higher bids to cover increased financing costs, and we will pay 
with diminished competition within our industry, and the worst 
part is that all of this is completely unnecessary.
    Let me be perfectly clear. I am opposed to companies 
receiving contracts when they don't pay their taxes. However, 
the government already has the information it needs to address 
this problem without putting the burden on small businesses and 
driving some small businesses out of business.
    When I registered in CCR like every other federal 
contractor, the government validated my taxpayer identification 
number with the IRS. This means that the government had all of 
the information it needed for debt collection and could check 
at that time to see if I had any outstanding tax liabilities.
    When I renew my CCR registry each year, which I'm inclined 
to do, the government could again determine whether or not I 
had outstanding tax liabilities. I also must supply 
representations and certifications whenever I submit a proposal 
that includes a statement that I haven't been convicted of tax 
evasion. At that time I would be happy to certify that I am 
current with my taxes. If done, it would insure that tax 
evaders were caught or risk suspension and debarment of false 
claims at penalties.
    Finally, CCR already shares information with agency payment 
systems. If someone does get a contract--excuse me. I am trying 
to roll it--and owes tax liability, the government should be 
able to withdraw the funds at that time. It is my understanding 
that some agencies already do so. The important thing to 
remember here is that the government can do all of these things 
without it costing law abiding small businesses a single penny.
    Member of the Committee, I ask that you help small 
businesses. I ask that you help minority businesses by 
supporting the repeal bill H.R. 1023.
    Thank you, and I am sorry it took a little longer.
    [The prepared statement of Mr. Coleman may be found in the 
Appendix on page 61.]
    Mr. Shuler. Mr. Coleman recognized when there was a rookie 
in the chair.
    Mr. Coleman. Absolutely, a rookie at the table. [Laughter.]
    Mr. Shuler. Well, I want to thank the entire panel for 
their testimony today. I, too, can relate to so many of you 
having a small business myself, being in the construction 
industry, being the health care industry. I, too, can relate to 
the added burden that so often is place upon our small 
businesses.
    And at this time we will move to questions from the 
Committee, and I would like to start off by asking Mr. Kahn a 
question concerning the health care industry. Can you talk more 
about the impact that this rule will have on small health care 
providers, especially in the rural areas which I come from?
    We have one major hospital and 15 small hospitals, and most 
of which are community managed hospitals. Through the paper 
work and administrative resources to handle the extensive paper 
work, can you tell me, you know, more of the problem and truly 
expand on what your testimony has already given us today?
    Mr. Kahn. I think if we look at all of the array of 
providers, particularly in the rural areas, whether it's the 
physicians that generally have small group practices, whether 
it's the suppliers, the durable medical equipment, whether it's 
the small hospitals in the rural areas, many of whom are for 
profit, half of my members have rural hospitals across the 
country. We know that the Medicare payments are already sort of 
very close to the margin so that these payments, if you deduct 
three percent is really like a three percent cut on a payment 
that already hardly meets your cost. That's the first issue.
    The second issue is just the complexity. The number of 
claims particularly for smaller providers who may be seeing a 
lot of patients and have a lot of small claims means that 
there's a lot of paper work that could be added because of 
this, and the question of whether or not the agency can even 
handle the administration of this three percent in a fair way, 
considering the way that claims are frequently refiled and re-
adjudicated and payments are made and then payments sort of go 
back and forth between the providers and the CMS, the agency 
that administers this program, is mind boggling.
    So I guess the first question here is did those who wrote 
this particular law even understand the implications for 
Medicare and for the Medicare beneficiaries, as well as those 
providing services, and did they--and I do not think they did--
even talk to the agency that would have had to administer this 
program?
    So one of the reasons that we are so fervent in our support 
for repeal is that we're not sure this is the kind of law that 
can even be administered fairly. In the contracting area, my 
fellow witnesses brought up all kinds of issues that arise, but 
here there's a basic contract, but this is a fee for service 
environment. It's an environment in which a provider is 
providing a service and then expects to be paid, and it's even 
different than the contracting environment where you can 
anticipate some of the effects, albeit the problems it raises.
    Mr. Shuler. Thank you.
    Mr. Whitman, I was wondering if you know of anything 
preventing the IRS from determining what amount has been paid 
to the government contractors or which businesses are receiving 
these Medicare or AG and contracting payments.
    Mr. Whitman. Is anything preventing the IRS?
    Mr. Shuler. Yes.
    Mr. Whitman. Well, currently there is no reporting is my 
understanding. There is no reporting that these payments made 
by the federal government or by the state governments. Some of 
my members have told me that when they're dealing with counties 
that some counties do provide a 1099; some don't. Some just 
decide to err on the side of safety and provide this, but there 
is no reason that governments couldn't simply report these 
payments that are being made. Therefore, the IRS could 
determine whether the income is reported, and that's the 
complaint. Is the income reported?
    Mr. Shuler. If you could give just one outside of just 
repealing the rule altogether, you know, that I can go back to 
my district and when I talk to my hospitals or my contractors 
or the people, this could be open for any of the members on the 
panel. If there was one thing that I could say because most of 
it is not being able to understand the rules, first of all, 
from so many of our people that say this is an added tax on and 
continuation of taxes and taxes and taxes pushed down; is there 
one thing that could help me when I am talking to my small 
businesses and groups, whether it be a trucking industry or 
whether it be a construction industry, that can also help us be 
more clear about how this tax is implemented and the reason and 
the major impacts that it causes in your small businesses?
    Mr. Whitman. I am sorry. To explain it more thoroughly?
    Mr. Shuler. Yes, yes, absolutely.
    Mr. Whitman. Well, I do not really look upon it as a tax. I 
look upon it as a penalty for doing business with the 
government, so to speak, that you lose your cash flow. It is 
considered to be a prepayment of tax because it is being 
withheld for federal tax payment.
    But we already have systems for doing it now. We have the 
estimated tax system where corporations estimate their tax 
liability possibly on a quarterly basis, go back and revisit, 
and make quarterly tax payments. This is just something on top 
of that that's unnecessary.
    Mr. Shuler. Right. Thank you.
    I yield back.
    Chairwoman Velazquez. [presiding] I now recognize the 
Ranking Member, Mr. Chabot.
    Mr. Chabot. Thank you very much, Madam Chair.
    I'll begin asking Mr. Coleman, if I can.
    You had requested the consideration of co-sponsoring H.R. 
1023, which would do away with this completely and as a result 
of your request and having studied this pretty closely, it is 
our intention to do that. So thank you for bringing that up.
    Secondly, you referred in your testimony to the fact that 
the construction industry is really keenly competitive and that 
construction projects are extremely complex. Again, how would 
the three percent withholding affect your ability to, for 
example, submit competitive bids?
    Mr. Coleman. What happens in our industry, Congressman, as 
Mr. Iannelli probably on the panel has stated earlier, we are 
already dealing with a ten percent retention, which is deducted 
from our monthly invoices on an ongoing basis, and we find that 
in the construction industry retentions are just commonplace, 
and to put on top of the ten percent a three percent retention, 
what it does is it creates a situation that we are taking three 
percent out of our pocket to fund this, and so that puts an 
added burden on construction companies.
    Now, we are already in a fight over this ten percent 
retention. We would like to see that eliminated because it was 
originally intended to make sure that the workers in the work 
place were being paid. Now there is all other types of 
protection against that. You have performance bonds. You have 
labor material and payment bonds that cover that cost.
    So you are taking ten percent, which our margins are tight 
already. So if a contractor is bidding a project and he has ten 
percent in there for fees, so what you are doing is you are 
trading dollars until you get to the very end of a project 
where you can realize the ten percent.
    But on top of that you take three percent. So I as a 
contractor have to go in my pocket and say, ``Okay, Mr. Federal 
Government. I will let you hold my three percent until some 
time in the future when you are assured that the taxes have 
been paid and everything is in compliance. Then you will 
release my money.''
    That puts an added burden on the contractor, large and 
small. It is a burden that we have to deal with, and generally 
we are financing retentions anyway. So we have to go out and 
find additional financing. If we cannot find the additional 
financing to be able to cover the cost of the additional three 
percent, you will see many businesses go by the wayside, and I 
do not think that is what the Small Business Committee is 
about.
    I think you guys are here to help, not hinder.
    Mr. Chabot. Thank you very much.
    Mr. Kahn, let me go to you next. One of the chief 
complaints that we hear from physicians and hospitals is the 
red tape and the reporting requirements and record keeping, and 
you have already touched on this to some extent already. This 
three percent withholding provision would be yet another layer 
of complexity, and I think perhaps a threat to physicians 
participating in Medicare, which is already a problem because 
of the reimbursements, etcetera.
    Could you comment on that very briefly?
    Mr. Kahn. Yes. Well, if we look at the physicians, and 
basically all physicians are for profit except a few that may 
work in universities, and so they would have three percent more 
withdrawn from their fees, and unless Congress acts, and I 
assume Congress will, but if it does not, there is a ten 
percent real reduction in fees coming January 1 of next year 
for physicians.
    So this causes a real problem for physician fees that were 
already low. It is a bookkeeping issue because Medicare claims 
are not simply a claim and then a payment is made. There are 
frequently, as I said, all kinds of contentions about the 
claims. So getting back your three percent when you file your 
taxes and the bookkeeping on that is going to be extremely 
complicated.
    Finally, Medicare knows physicians, the suppliers, the 
hospitals that they do business with. I mean, there are 
Medicare numbers each of these people have to have. There are 
papers constantly being filed with Medicare. So if IRS can 
narrow down these individuals, which they ultimately have to 
do, the bad actors, the GAO report shows they can be found. All 
you have got to do is have communication between IRS and 
Medicare, and Medicare can locate the bad actors and action can 
be taken on the bills that they have filed, and those claims 
can be held by Medicare, you know, until adjudication.
    So this issue of affecting everybody will have 
administrative effects. It will have cash flow effects, and it 
is a big problem. And, frankly, on the hospital side, 35 to 40 
percent of your business is Medicare. You can't walk away from 
Medicare.
    On the physician side, many communities, depending on the 
practice, many physicians today look at Medicare and say, ``Can 
I really afford to provide services to Medicare 
beneficiaries?'' And this adds sort of another piece to that.
    And when it goes into effect in a few years, if the program 
continues on the path that it is, it could cause real access 
problems for Medicare beneficiaries because more physicians 
could say, ``Gee, I am just not going to put up with the 
hassle. I cannot afford the cash flow issues or the paper work 
issues.''
    Mr. Chabot. Thank you very much.
    Madam Chair, if I have time for one more question, I'll 
just put it to the other three witnesses, if you could all 
comment on this briefly.
    Part of the SBA mission, as we all know, is to help small 
businesses to receive a fair share of government contracts, and 
it is not easy oftentimes for small businesses, given the 
challenges in contracting with the federal government. Do you 
think that small business is likely to increase or even retain 
its percentage of government contracts given this new, complex 
constraint, and is it possible that small businesses could even 
lose some of its current share if this is enacted?
    I will start with you, Mr. Whitman and Mr. Deel and Mr. 
Iannelli.
    Mr. Whitman. Yes, my members tell me this. The situation is 
that by taking out the three percent, especially for the 
smaller businesses that you mention poses a huge problem with 
the cash flow situation for these companies, and so they're 
going to have to take a hard look at whether they can do 
business with the government with all of the other hoops that 
they have to jump through.
    So a few people have told me, and we have discussed this in 
our small business committee, that they definitely would shy 
away from doing business with this provision.
    Mr. Chabot. Thank you very much.
    Mr. Deel.
    Mr. Deel. My companies compete in the motor carrier 
industry, and one of my largest competitors in the segment that 
we serve, which is the Department of Defense is a large, 
publicly traded company, very well capitalized with a lot of 
capacity, thousands of trucks compared to my company of a few 
hundred trucks.
    They can withstand this three percent more easily than my 
company can, and so I would have a difficult time raising rates 
if they do not raise rates as well because of this, and so I 
would lose competition because we compete. Price is very 
important. The lowest price carrier get the bid from the 
government, and so I would either have to operate at a lower 
margin or lower cash flow or exit the market. It would probably 
be difficult to raise rates if our larger competitors do not 
because they can withstand the cash flow impact of this.
    And I have a lot of competitors that are small like me as 
well, who will have the same problem. So, yes, I think the 
answer is probably fewer motor carriers vying for the 
government business.
    Mr. Chabot. Thank you.
    Mr. Iannelli.
    Chairwoman Velazquez. Would the gentleman yield for a 
moment?
    Mr. Chabot. Yes.
    Chairwoman Velazquez. Mr. Deel, you know, this three 
percent withholding applies to prime contractors. So do you 
think that a prime contractor will withhold if they are doing 
business with a subcontractor? It will push down to the 
subcontractor?
    Mr. Deel. I think that is certainly possible, and even in 
my company I use subcontractors, independent owner-operators 
that work for my company, and I would be faced with the 
decision: do I carry that three percent burden or do I pass it 
on down to that real small business person?
    That would be the decision that would have to be made, but 
likely I think it is going to go downhill to the lowest common 
denominator.
    Mr. Chabot. Thank you. I will reclaim my time.
    Mr. Iannelli.
    Mr. Iannelli. I would love to pass along a three percent on 
my future bids, but I know that is never going to happen 
because the contracting climate in New York City, there is 
always somebody out there who is going to come along and 
basically work for less than that.
    I think I might move to Ohio though.
    [Laughter.]
    Mr. Iannelli. Working on ten percent, and I think I would 
love to do it. So give me your address and I will be there 
tomorrow.
    [Laughter.]
    Mr. Iannelli. Here I come.
    As far as passing the costs down to the subcontractor, and 
you also know, too, it could never happen because there's no 
legitimate reason for me to tell my subcontractors I am 
withholding three percent of your money because they are 
worried I am not paying my taxes. It is not going to work.
    So it is just a bad situation that I think should not be in 
place.
    Mr. Chabot. Thank you very much.
    Madam Chair, this has really been an excellent panel. So 
thank you.
    Chairwoman Velazquez. Thank you.
    Mr. Ellsworth.
    Mr. Ellsworth. Madam Chairwoman, thank you for calling this 
hearing. I cannot think of anything that we do in the federal 
government, anything that needed a light shown on it, it is 
this subject, and I appreciate that.
    Mr. Deel, do you pay your taxes on time, your federal taxes 
on time?
    Mr. Deel. Yes, I do.
    Mr. Ellsworth. Mr. Coleman, do you pay your federal taxes 
on time?
    Mr. Coleman. Yes.
    Mr. Ellsworth. Have either of you--sorry.
    [Cell phone interruption.]
    Mr. Ellsworth. I pay mine on time, too.
    [Laughter.]
    Mr. Ellsworth. Totally forgot my line of questioning.
    Have either of you ever changed the name of your company, 
opened a new company and applied for a new TIN in order to 
secure a new federal contract or avoid because you had not paid 
one, know you cannot get a contract under your old TIN and so 
you open a new company or change it in order to get a federal 
contract?
    Mr. Deel. No, sir.
    Mr. Coleman. No, sir.
    Mr. Ellsworth. Have you ever heard of that or know of that 
to occur, that somebody opens a new company, changes the name, 
applies for a new TIN? I think Mr. Coleman alluded to this, 
that it occurs.
    Does that occur?
    Mr. Coleman. Yes, it does.
    Mr. Deel. Yes, sir.
    Mr. Ellsworth. Would one or both of you touch on what that 
is like, how that puts you at a disadvantage? Law abiding, tax 
paying companies to compete against a person or a company that 
does that and how that puts you at a disadvantage on a federal 
contract.
    Mr. Coleman. Well, one of the things that it does when it 
happens, it basically takes work away from you. You will find 
instances where a contractor will do something like that, and I 
know an example where it has happened, where you feel that, you 
know, you have put together a very responsible organization. 
You are paying your taxes. You are employing people. You are 
paying good wages, and to have a contractor come by to try and 
beat the system like that, all of the good things that you have 
done, you know, trying to build and participate and be a part 
of the American dream, to just go fall off the table, so to 
speak.
    And one of the things that in our organization and our 
campaign for quality construction that we are trying to do is 
lobby Congress to tighten up the contractor responsibility 
laws, and if we could get something like that, we could 
eliminate this problem. Then you can have capable, qualified, 
good contractors performing the services to our government, and 
that is what it should be about.
    We do not need the competition. We do not mind competition, 
but let the competition play on the same field. Let the playing 
field be level, so to speak, and that we are all competing 
under the same guidelines, the same rules, and we are okay with 
that.
    I do not mind losing the contract to Mr. Iannelli when he 
is out doing the same thing, paying his taxes, you know, doing 
the same things that I am doing as an organization. What we do 
mind is when you allow someone to not play by the rules, beat 
the system and drive legitimate taxpaying contractors out of 
business.
    Mr. Deel. I agree with all of those comments. It is 
certainly troubling to know that businesses or individuals 
avoiding the tax that they would otherwise owe by changing 
their corporate name or their federal ID number. Those same 
kind of individuals are not just avoiding federal taxes. They 
are also maybe not paying their contractors or suppliers, and 
the list goes on.
    Those kinds of people that are unscrupulous are just 
disheartening for us that are quality business people. We pay 
our taxes and we vie for the business and would like to see it 
on a fair, competitive playing field.
    Mr. Ellsworth. Certainly they know that if they are not 
going to pay their taxes, they can bid that at a lower rate.
    Mr. Deel. Absolutely.
    Mr. Ellsworth. Well, again, Chairwoman, I appreciate this. 
This goes right to the heart, and, Mr. Coleman, you could add 
me to co-sponsors on the bill you have mentioned. This goes 
right to the heart of what the people in Indiana and, I am 
sure, across the country drives them crazy. They do not mind 
paying taxes. They mind getting ripped off. You are being 
ripped off, and I will do my part.
    Thank you very much.
    Chairwoman Velazquez. Thank you.
    And now I will recognize Ms. Musgrave from Colorado.
    Ms. Musgrave. Thank you, Madam Chairman.
    And I would like to compliment you on the fact that you are 
holding hearings that really get to the heart of what is 
affecting small businesses, and I really applaud you for your 
efforts.
    You know, when we are talking about this mandatory three 
percent withholding, it just really illustrates what happens 
when you have something done in a conference where there has 
not been open debate and then later everybody raises their hand 
and says, ``Wait a minute. You know, this is really going to 
hit small businesses hard.''
    And we are seeing that today, and I certainly will be a co-
sponsor of the repeal. You know, Mr. Chabot spoke with you, Mr. 
Kahn, about Medicare providers, the impact on physicians with 
paper work, and you know, I am very concerned as the elderly 
population increases that we need docs who are going to accept 
Medicare patients, and here is one more thing now to put on top 
of it that is going to be a disincentive for them, and that 
concerns me greatly.
    Could someone elaborate for me on the federal payment levy 
program and see how this differs from this mandatory three 
percent withholding?
    Mr. Kahn. Well, in the levy program, they identify the bad 
players and in a sense go after them and their payments. It is 
a very direct one-two, and at least in terms of our experience 
in sort of observing that, we deal with the Department of 
Health and Human Services, and they have been very reticent to 
get into it, and we think that either the Congress needs to 
tell or the administration needs to decide that the HHS is 
going to play because clearly in terms of provider numbers and 
other information, Medicare has the information to locate 
providers and physicians who are not paying their taxes if the 
IRS has the information.
    So you cannot change a provider number very simply. It is 
even more difficult than in the other areas that have been 
discussed. So we think it is a question of the government 
getting its act together and CMS, the agency that oversees 
Medicare being told to do it.
    Ms. Musgrave. Thank you for that response.
    You know, as I looked at the big picture on this, can any 
of you address how this will affect your ability to reinvest in 
your business, grow your business and create jobs if this is 
not repealed?
    Mr. Deel. Well, I will start with my particular companies. 
We do a lot for the U.S. government, and that three percent 
would amount to for us about a million dollars a year, and that 
is one million dollars less that I would have available to buy 
tractors or trailers or grow my business, and that's a million 
dollars of working capital that I wouldn't otherwise have 
available to me.
    So, yes, that is a huge amount of money for my particular 
group of companies.
    Ms. Musgrave. Very dramatic.
    Mr. Deel. Yes.
    Ms. Musgrave. Does anyone else want to respond to that?
    Mr. Coleman. I would. In my company, in the construction 
industry three percent could be ten jobs, and we should be at 
the point of developing jobs and work for our society.
    It also takes away cash flow, and in our business we need 
cash flow. We are already dealing, as I said before, with a ten 
percent retention which takes away cash flow. So we struggle 
with cash flow, and for those businesses that cannot go to a 
bank or cannot go to some type of financial organization to get 
that finance, they are going to struggle.
    They will not be able to grow their businesses. Three 
percent to some major corporations may not sound like a lot of 
money, but to a small, emerging business, it is a lot of money, 
and in my organization ten jobs is a lot of jobs. So it is 
going to have a dire effect on cash flow in our organization.
    Mr. Kahn. You know, I would like to add that if I 
understand the GAO reports, a good bit of the problem is with 
payroll taxes. So, one, this does not go to the heart of 
payroll taxes, and frankly, in the hospital business, as I 
said, we are around 20 percent of hospitals. We are competing 
with tax exempt hospitals that do not pay income taxes. So they 
will get their full Medicare payment and we will not when the 
issue is an issue primarily of payroll taxes.
    And anybody who is not paying their payroll taxes is not 
just cheating the government. They are cheating their employees 
and probably should be hung, particularly if they go out and 
spend the money on luxury items and things, which is what the 
GAO report concluded.
    So I think we need to find solutions to this problem, and I 
understand in the GAO report that they just came out with the 
other day that five percent of physicians and suppliers being 
paid by Part B of Medicare have some kind of problem here, and 
that is a big number. It is shocking.
    But they should be dealt with. They can be identified, and 
taking money away from everyone will put everyone at a 
disadvantage.
    Ms. Musgrave. Thank you, and I yield back, Madam Chairman.
    Chairwoman Velazquez. Thank you.
    And now I recognize the gentleman from Pennsylvania, Mr. 
Altmire.
    Mr. Altmire. Thank you, Madam Chair.
    And I want to thank the panel for being here today and for 
full disclosure, say that I used to work at the Federation of 
American Hospitals before Mr. Kahn was there, but I am glad to 
see you here today as well.
    My first question is for Mr. Deel, and I just wanted to ask 
for my own benefit if you could give me an example of how 
withholding three percent of payment is different from 
withholding three percent of taxable income from your business 
perspective.
    Mr. Deel. Well, three percent of the top line, my revenues, 
three percent of the gross revenue is entirely different than 
three percent of the net. In our industry, take just five 
percent is the pre-tax number of the top line. So if the 
company has a million dollars a year of gross revenues that the 
three percent would come out of, that would be $30,000. If that 
company only makes five percent of that million, that is 
$50,000 of taxable income and times the tax rate, you can see 
there that taking a three percent of the gross top line has no 
correlation to what your bottom line may be. It is just a wrong 
way of trying to get at the taxes that are not being paid by 
companies.
    Mr. Altmire. And if we repeal the requirement to withhold 
the three percent, how will we be able to offset the cost to 
the tax breaks from the original legislation? What would you 
suggest?
    Mr. Deel. My recommendation would be do what Mr. Kahn has 
been talking about and additionally implement a 1099 reporting 
kind of mechanism for any government payments to any company, 
whether they're large business, small business, sole 
proprietary; that there is a mechanism to report to the 
Internal Revenue Service. This is a tried and true method of 
1099 reporting.
    They would know what your federal ID number is. A company 
would have to sign a W-9 form certifying what your tax 
withholding number is your federal ID number, and at least the 
IRS would have the ability to follow and see is this company 
either filing a tax return, and if they are, are they reporting 
their revenues correctly?
    I think the combination of following up and withholding 
money from companies that do not pay their taxes that the IRS 
knows about is great, and I think additionally there needs to 
be reporting similar to when you receive an interest statement 
from your bank, a 1099. The IRS checks to make sure you put 
that on your tax return.
    That would be one relatively simple way of doing it, and it 
would only be a burden to the government agency once a year. 
They have to keep track of it during the year, but it is just 
one piece of paper that has to get sent out, one to the 
business owner and one to the Treasury department.
    Mr. Altmire. Okay, and for Mr. Iannelli and Mr. Coleman, 
you both talked about some of the bonds that are required in 
your industry to perform certain types of work, and it seems 
that surety bonding would require that they look at your books 
to make sure that you are financially solvent.
    Can you each discuss with the committee the type of records 
that you think they will look at in determining your 
eligibility for those bonds?
    Mr. Coleman. Well, number one is the financial statement. 
They're going to look at the financial statement. They're going 
to require audited financial statements. When you reach a 
certain level of bonds, they're going to require an audited 
statement and you're going to go through a full blown audit to 
make sure that you are capable of being able to perform at 
whatever level that you're performing at. That's number one, 
first and foremost, with those organizations.
    And if you don't meet their requirements, chances are you 
are not going to get a performance bond, and without 
performance bonds, you don't compete in the public environment, 
and not only public environment from a federal standpoint, but 
you're not going to compete with the local and state 
municipalities as well.
     Mr. Iannelli. The bonding community in New York City has 
dried up considerably. So there are not a lot of places where 
your contractor can go for bonds, and they have regulations and 
requirements that are about, you know, they basically want to 
come over to your house and see how you live.
    And my bonding company every year, the financial statement, 
wants to check my tax returns and make sure the bottom line or 
whatever I said that I grossed on my tax returns is what I'm 
saying is the bottom line on my financial statement. So they 
check. There are checks and double checks and triple checks. So 
there is no way out of it, no way I could not pay my taxes.
    Mr. Altmire. Great. Thank you.
    I yield back my time.
    Chairwoman Velazquez. Mr. Jordan from Ohio, you are 
recognized.
    Mr. Jordan. Thank you very much.
    That is a rookie for you right there.
    [Laughter.]
    Mr. Jordan. But I do appreciate the panel, and Mr. Deel's 
testimony as well. You know, there is nothing like mathematics 
to show what is going on. Sometimes politicians are not too 
good in that subject, but it is good to have that in front of 
us. So I appreciate what you are doing.
    This is just, in my judgment, one more example of 
government saying we are smarter than the business owner. We 
are smarter than the family out there. We want to use your 
money for the year instead of letting you use it and invest it 
in jobs and business and in our community.
    So I think it is a good piece of legislation that we should 
pass, and I appreciate the panel's testimony today, and I yield 
back.
    Chairwoman Velazquez. Thank you.
    Mr. Whitman, it seems that the three percent withholding 
could have a particularly harsh impact on the tech industry 
where start-up costs are high and financing is critical. Do you 
believe that this change could have a negative effect on 
innovation in technologies because of the unique financing 
challenges facing your industry?
    Mr. Whitman. Well, when we were talking about research and 
development, typically research and development is done by 
larger organizations. Our members are typically smaller tech 
companies that are the providers of services. So I would not 
really speak to whether or not this three percent would affect 
innovation.
    Chairwoman Velazquez. Mr. Deel and Mr. Coleman and Mr. 
Iannelli, maybe the three of you can address my question.
    As the tax code has become more complex, so have the 
organizational set- ups of small businesses. The structure of a 
company can be based on a number of factors, including estate 
planning, liability concerns, and partnership sharing. Do you 
think this three percent withholding could be particularly 
burdensome for certain types of organizations, whether that be 
an S corporation, a partnership or some other structures?
    Mr. Deel. I had not thought earlier until one of the other 
testimonies about the complexities of an S corporation or a 
partnership. This money is going to be withheld and sent over 
to the Treasury Department, and they are going to have to match 
that against the federal ID number, but if the real taxpayer is 
a member of an S corporation or a partnership, be the one 
paying the tax on the income, how will that match up that they 
will be able to get credit on their 1040 tax return when they 
file it or the money that was paid in under the corporation's 
tax ID number or the partnership's ID number?
    That is going to be a nightmare I would just imagine.
    Chairwoman Velazquez. Yes. Any other witness who would like 
to answer?
    Mr. Kahn. Well, I think in the health care situation, 
particularly in group practices for physicians or in the 
hospital situation there may be subsidiaries that actually 
could create a similar kind of situation where some kind of 
holding entity is actually paying the taxes and you have got 
other entities that now are going to lose money on their 
Medicare payment, and the bookkeeping issues, assuming that you 
can even locate all of the dollars are going to be a big 
problem.
    Chairwoman Velazquez. Thank you.
    The federal government and I have been particularly on this 
issue for the many years that I have been serving in this 
committee making sure that small businesses have an opportunity 
to do business in the federal marketplace, and in fact, the 
contracting goal of the federal government has not been reached 
for several years now of 23 percent.
    I would like to hear from the witnesses on how they think 
this change will affect small business' abilities to get 
contracts over large competitors, and do you believe that the 
cash flow issue will limit the ability of small contractors to 
perform these contracts?
    Mr. Coleman.
    Mr. Coleman. I think it will limit the ability. We're 
talking cash flow in many cases, and any amount of cash flow is 
important to a small business. My biggest fear is this three 
percent will drive some of your small emerging businesses out 
of the marketplace, and I do not think that we really want to 
do that.
    In our group we feel that this three percent is just a bad 
idea, and there has got to be other ways to be able to reach 
the goal that you want to see accomplished and closing that tax 
gap and not penalize small emerging businesses in the process. 
I just think it is a bad idea.
    Chairwoman Velazquez. Could the government end up paying 
more for contracts because of this change?
    Mr. Coleman. They will pay more. They will pay more in 
increased costs because those that can finance it are going to 
try and pass that cost on to the federal government. You will 
pay more with reduced competition because if you drive 
businesses out of business, that means you're going to have 
less competition in the marketplace for the work that you're 
putting out there for bid or for offerors.
    Chairwoman Velazquez. Okay. Any other witness? Yes, Mr. 
Whitman.
    Mr. Whitman. Yes. And for those businesses that are in the 
smaller end of the spectrum, as they lose this operating 
capital because of the withholdings, they will have to go into 
the market to borrow, if in fact they can borrow, and this is 
another cost that they will have to pass on to the government. 
So, I mean, no matter how you cut it, it's going to be more 
expensive for the government, and it's going to be bad for 
small business.
    Mr. Deel. I can give a recent example how the motor carrier 
industry that serves the Department of Defense transportation 
needs. Several years ago they made the decision that the way 
they would pay the carriers is through a system called 
Powertrack. It's through U.S. Bank, and they withhold 
approximately two percent from your payment to receive the 
funds by electronic wire.
    Well, that two percent charge is a very expensive charge 
for the cash for that faster payment, and what the industry did 
was raise rates by approximately the two percent. That was the 
general reaction.
    So to answer your question about will the costs go up, it 
is likely that they will through reduced competition if some of 
the small business goes out and the bigger guys that are left 
say, ``Well, we can raise rates now.''
    And one further thing I'd like to say is that when I 
started my company ten years ago, had this been in place, it 
would have been very, very difficult for me to be where I am 
today. In those early years cash was very, very tight. Cash 
flow was I refer to ``cash is king.'' I could not have grown my 
company with this three percent and served the government 
market.
    Chairwoman Velazquez. Thank you.
    I will recognize the gentleman from Georgia, Mr. 
Westmoreland.
    Mr. Westmoreland. Thank you, Madam Chairwoman.
    And I want to say that I look forward to working with you 
and the rest of the Committee on repealing this crazy thing, 
and I also want to apologize to the people. I am embarrassed 
that this was passed during a Republican control of Congress, 
and I think this is an example of what happens when we 
hurriedly pass some of these big pieces of legislation, two and 
three and 400 pages of very technical stuff, and we have a very 
short time in which to look at it. Madam Chair, I think this is 
one of those things that got past all of us, and especially the 
people that are familiar with small business.
    So forgive us, and hopefully this year if we can right this 
wrong, I think it will be the highlight of my congressional 
career in a short three years just to right any wrong, but 
especially this one.
    [Laughter.]
    Mr. Westmoreland. Mr. Coleman, I am a small business guy, 
too, and I was in the construction business all my life, a Mom 
and Pop guy, and when I was in the state legislature I fought 
very hard to make sure that procurement of government contracts 
was available to all business, small, large, minority, whatever 
the case is. Everybody had an opportunity to do this, and you 
know, we passed--I say ``we,'' but I did not have any 
responsibility for this--but back in the late 1980s, we passed 
a tax called the AMT tax, the alternative minimum tax, and it 
was designed to get 150 millionaires who did not pay any taxes.
    This year I think it is going to affect 20 million people. 
So something that they did to catch 150 has developed into a 
bunch of us.
    In contract, I think it is the same thing. While their goal 
was good and what they wanted to do--well, I do not know that 
it was good in what they wanted to do, but it is not small 
business' job to enforce the tax codes. Now they are wanting us 
to enforce immigration laws, tax code. I mean, I do not know 
what else we are going to be responsible for.
    But in your testimony, and I read your testimony. I am 
sorry I was not here for you to give it, but in reading your 
testimony, you said it is anywhere from five to ten percent of 
your payment. In a small business cash flow kind of crunch, 
that is a lot, isn't it?
    Mr. Coleman. Exactly.
    Mr. Westmoreland. And I know from my experience in small 
business a lot of these large government contracts, I never got 
any of them, but--
    [Laughter.]
    Mr. Deel. You were lucky.
    Mr. Westmoreland. Yes, I know I was lucky, yes. I did not 
have an opportunity to lose money.
    [Laughter.]
    Mr. Westmoreland. But three percent was in some cases all 
of the profit you were going to make, and I think going back to 
what Mr. Deel said, it is going to drive the small guys out of 
business, and the guys that had some fat in it that can afford 
the three percent will be the only ones left, and then once 
small business is driven out of it, then the prices are just 
going to escalate at a rapid rate, and I think we are going to 
see an outcome that is not going to be good for us all.
    But can you speak to what you were talking about as far as 
your association of contractors and how you kind of police 
yourself, I guess, on this?
    Mr. Coleman. Yes, yes. Our association of contractors have 
campaigned for quality construction. We like to think of 
ourselves as a group that want fair legislation, legislation 
that all can abide by, have that level playing field, so to 
speak. We want to do the right things.
    We pay very good wages. Just about all of our members are 
associated with collective bargaining agreements where we 
negotiate with the local building trades unions to put forth 
some very good packages with health and welfare benefits, 
multi-employer pension plans that are portable. The gentlemen 
or women in our association are in building trades unions. They 
can move from state to state, city to city and work and have 
everything travel and go along with them.
    And we think that it is a very good situation for all 
parties concerned, and we all want to do the right thing. We 
all want to pay our taxes. We all want to be good citizens. It 
is that when situations are created where that playing field 
gets tilted, we're running up here on the Hill trying to meet 
with you and your constituents to help get this thing back to 
level so that we can all go down the road and do the right 
thing for our businesses and for our country by paying our 
taxes so that you guys can have the funds to do what you need 
to do on the other side back in our district.
    Mr. Westmoreland. If you find that level playing field, 
take a picture of it because I've been looking for it for 
years, and it is always tilted one way or the other.
    [Laughter.]
    Mr. Westmoreland. I do not know what it is, and I am sure 
all of your associations are the same, that you try to police 
yourselves. You want to be the blue chip association of 
organization where when your members come in they feel like 
they have been accredited in some way to be part of it and you 
are responsible for people.
    Government does not need to be policing it for you. I think 
you will do a great job of it yourselves.
    Madam Chairman, with that I will yield back and just tell 
you that I am looking forward to working with you and see if we 
cannot right this wrong.
    Thank you.
    Chairwoman Velazquez. Thank you.
    Mr. Coleman.
    Mr. Coleman. Yes, I wanted to make one more point that the 
Congressman raised about the five to ten percent retention. I 
think to get a clear understanding of what the retention is 
about, if we had a million dollar contract, and I billed a 
million dollars a month, they are going to take $100,000 of 
that million dollars a month away from me, and they are going 
to hold that until the completion of the project.
    Now, when I buy equipment, materials, and provide labor on 
my project, I am not going to pay the labor that I have working 
90 percent of what he is due in the week. He will be up here 
and you will come and shut me down.
    When I buy equipment, if I have to buy a piece of air 
conditioning equipment and it costs me $100,000, I have got to 
pay that $100,000 right then and there. I cannot pay the guy 
$90,000 and expect him not to put a hold or come after me for 
the balance of his money.
    So that money that we are being withheld, that money is the 
type of dollars that we have to go and finance or take out of 
our business to be able to make sure that everyone is whole 
while we wait in the public environment to the end of the 
project to be able to get those dollars back.
    And then when you put three percent on top of that, now we 
are talking 13 percent. We are not talking ten percent, and 
that is what I mean by the effect of cash flow in our 
businesses. It is devastating. And if you want to put some 
small businesses out of business, then pass this legislation. 
That is how devastating it will be to our constituents across 
the country.,
    Mr. Westmoreland. Can I make one comment to that?
    That is a great point about the ten percent retainage 
because what we probably need to do is pass some type of 
legislation that says the government has to give you back that 
ten percent retainage in a timely fashion. Because I know that 
sometimes that retainage is tough to get in a timely way, and 
you may have to wait 90, 120, six months.
    Mr. Deel. Year.
    Mr. Coleman. In some cases.
    Mr. Westmoreland. Years, and a lot of time that ten percent 
is more than your profit; is that not true?
    Mr. Coleman. That is true.
    Mr. Westmoreland. Thank you, sir.
    Chairwoman Velazquez. The time has expired.
    I have another question, my last questions, and I want to 
address it to Mr. Kahn or Mr. Whitman.
    In your testimony you talk about how the budget score of 
the three percent withholding requirement was not an accurate 
reflection of the effect on the federal budget. So I was hoping 
that you could shed some light on why the $7 billion is not an 
accurate figure. How much of this is attributable to taxes that 
will have not been paid otherwise?
    In other words, how much it will actually close the tax 
gap?
    Mr. Kahn. I think what we were referring to, and this is 
something, joint tax, whatever, would reveal. I am not sure 
they looked at the Medicare program as one of the sources of 
revenue here that would be affected by the three percent, and 
there is some evidence to that.
    So, one, we think that the estimate understates what would 
be collected because you're talking about, you know, three 
percent on the Medicare program, which is hundreds of billions 
of dollars, and of course, there are tax exempt organizations 
that would get the three percent, but they only make up 
probably about 35, 40 percent of Medicare spending.
    So we think the effect is going to be much greater on 
revenues than was anticipated.
    Mr. Whitman. Yes. Are you speaking to the fact as to 
whether or not this three percent will close the tax gap? Oh, 
okay. Fine.
    The three percent withholding does not do anything. It is 
the reporting of the income that does something. So the IRS can 
determine if a contractor, if a person has reported that income 
on the return. So if we have that, we do not need the 
withholding. Withholding does not close this tax gap in any 
fashion. It simply is money that would have been paid at the 
end of the year had it been owed.
    Chairwoman Velazquez. Thank you.
    Well, I want to thank you all for taking time to come here 
and talk to us about this important issue, and you know, this 
Committee, I want to use it as a vehicle to be able to raise 
the profile of the impact of this issue on small businesses. So 
I want to thank all of you for your participation, and without 
objection members will have five days to submit a statement for 
the record.
    With that, this hearing is adjourned.
    [Whereupon, at 11:36 a.m., the Committee meeting was 
adjourned.]


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