[Congressional Record (Bound Edition), Volume 152 (2006), Part 16]
[Extensions of Remarks]
[Pages 21719-21720]
[From the U.S. Government Publishing Office, www.gpo.gov]




         INTRODUCTION OF THE WITHHOLDING TAX RELIEF ACT OF 2006

                                 ______
                                 

                           HON. WALLY HERGER

                             of CALIFORNIA

                    in the house of representatives

                      Thursday, September 28, 2006

  Mr. HERGER. Mr. Speaker, I have long championed tax relief for small 
businesses because I believe such firms are the lifeblood of our 
economy. As a small businessman myself, I know how small business 
owners struggle to remain profitable in a highly competitive and 
extremely challenging environment. Yet they continue to be the drivers 
of much of our Nation's economic and new job growth. It is for this 
reason that I have strongly supported increases to the current section 
179 small business expensing limits, an end to the onerous death tax, 
and the reduced double taxation of capital gains and dividends. I am 
concerned, however, that a little known revenue raising provision, 
passed as part of the tax reconciliation bill in May, will hamper small 
business' creative spirit by significantly and adversely changing the 
way governments pay for the goods they use and services they require.
  Effective in 2011, section 511 of the Tax Increase Prevention and 
Reconciliation Act of 2005 will require federal, state, and local 
governments to withhold 3 percent from payments for goods and services, 
excluding payments to non-profits and those made by governments with 
less than $100 million in annual expenditures. This onerous provision 
will not take effect for 4 years. But I believe we must begin 
addressing the impacts it will have on honest taxpaying businesses now, 
and actively seek alternatives to withholding in the meanwhile.
  Every day, thousands of businesses and individuals across the country 
are reimbursed by governments for various reasons. In my Northern 
California congressional district, governments rely on local and 
regional businesses all the time to maintain public services--from the 
electrician who rewires a city council chambers in Redding to the 
construction company that builds an interchange at a dangerous stretch 
of highway in Butte County. When the Feather River needs a new setback 
levee, or an existing levee in the network requires urgent repairs to 
protect the community, the Army Corps of Engineers employs local 
businesses for construction and materials. Similarly, when an escape 
route from a fire- prone community requires widening, the government 
turns to local sources to get the job done. In 2011, however, firms 
providing these necessary goods and services to governments will see 3 
percent of their payments withheld.
  I am troubled that the withholding provision will effectively force 
firms to float a new interest-free loan to the federal Treasury if they 
do business with a local, state or federal government. In addition, 
unlike other income-based withholding, which is actually based on tax 
liability, the new government withholding provision is based on 
government payments with no relationship to a company's taxable income. 
This means that, while businesses will be deprived of much needed cash 
flows for day-to-day operations, the 3 percent provision could end up 
significantly over withholding for tax purposes. The Joint Committee on 
Taxation (Joint Committee) confirmed this in its description of the 
provision, stating ``sellers of goods and materials are more likely to 
have overwithholding and, thus, bear more of the burden of a flat rate 
because of the lower profit margin on such sales relative to sales of 
services.''
  The provision would also disproportionately harm small-and medium-
sized businesses that operate on low margins, and contractors that 
frequently employ subcontractors. It is conceivable that, faced with 3 
percent withholding on a revenue source, companies that do business 
with governments may inflate contract costs to compensate, shift costs 
to subcontractors, or simply hire fewer employees over the course of 
the year. Others may resort to increased debt financing to make up for 
reduced cash flows. In addition, governments at all levels have 
expressed concerns over the new administrative burdens that such 
withholding will require.
  Among the reasons for inclusion of this provision was a desire to 
reduce America's tax gap, or the difference between the taxes we 
believe should be collected in a given year, and those that actually 
are. The Internal Revenue Service currently estimates the net tax gap 
to be in the area of $290 billion. Whether due to taxpayer error or 
willful tax avoidance, the tax gap is a very real problem that can 
undermine taxpayer confidence in the voluntary nature of our tax 
system, and encourage continued non-compliance. According to the 
National Taxpayer Advocate, the ``cost'' of the tax gap could be 
equated to a $2,000 annual ``surtax'' on each taxpayer to subsidize 
non-compliance. The result is that the tax gap ends up ``harming 
compliant taxpayers because they pay their correct tax liability while 
others do not.''
  Like many, I believe that bridging the tax gap and encouraging tax 
compliance should remain a top priority of both Congress and the 
Administration. Where identification of specific non-compliant sectors 
of the economy has been difficult, the Administration should continue 
to investigate ways it can use its existing authority to improve the 
collection and utilization of non-wage taxpayer information for 
enforcement purposes. In addition, as better information on 
noncompliance is generated, Congress should actively consider whether 
additional legislation is needed to crack down on tax cheats.
  Prior to implementing a new tax collection regime, such as the 3 
percent withholding provision, we should investigate what other methods 
are at our disposal to deal with the outstanding problems of non-
compliance. To this end, I believe that any solution that aims to 
reduce the tax gap should consider the impacts of new burdens on 
taxpayers. For this reason, I am pleased to introduce the ``Withholding 
Tax Relief Act of 2006,'' a companion to legislation introduced in the 
Senate, S. 2831, by Senator Larry Craig of Idaho.
  While I recognize the underlying problem of tax compliance must be 
addressed, I believe this problem--as it pertains to businesses and 
individuals that provide goods and services to governments--can be 
tackled in a less intrusive manner than withholding, and with positive 
results. As reported by the Joint Committee, the withholding provision 
is estimated to increase revenues coming into the Treasury by $6.079 
billion in its first year of implementation, and between $215 million 
and $235 million per year over the next four years. Further, the Joint 
Committee recognizes that the ``significant revenue effect'' in the 
year of implementation ``is largely attributable to accelerating tax 
receipts,'' indicating that the additional compliance sought by this 
provision is really in the ballpark of $235 million. Still, in order to 
recapture this amount of unpaid taxes, the withholding provision will 
affect over $6 billion of government payments tohonest business and 
individual taxpayers.
  It is probably unrealistic to think that we could ever reduce non-
compliance to zero, especially given the enormous complexity of our 
CUlTent tax code. But apart trom fundamental tax reform and 
simplification, increased compliance should remain an objective. 
Congress and the Administration should continue to pursue increased 
compliance alternatives, including the use of the federal government's 
already broad authority to levy federal payments, improve coordination 
and use of taxpayer information, require new information reporting, or 
increase enforcement. Ultimately, though, any alternatives that focus 
on compliance should be balanced against the new burdens such 
compliance mechanisms would cause. We should avoid placing unnecessary 
burdens on all honest taxpayers in a particular sector of the economy 
to force the compliance of the few.
  Although I recognize that repeal of the 3 percent withholding 
provision will leave the actual problem of non-compliance unanswered, I 
believe withholding is the wrong policy approach to this issue. Repeal, 
as proposed in the ``Withholding Tax Relief Act of 2006,'' serves as a 
reminder of the importance of this issue, and the need to seriously 
address the impacts this policy will have on businesses in my 
congressional district and elsewhere in the country. In addition, we 
must also begin discussion of alternatives to withholding. I intend to 
continue working with the business community and others in the 110th 
Congress on ways to reduce any eventual burdens this provision will 
cause, as well as alternatives to withholding that will reduce taxpayer 
non-compliance.

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