The last time Congress went on a deficit-cutting spree, lawmakers thought they had settled on a great way to squeeze more money from deadbeat contractors: Withhold 3 percent of all government contracts to make sure those companies paid their full tax bills each year.
Five years later, all sides are rushing to repeal the withholding, saying the $11 billion it would save over the next decade is far outstripped by the herculean bookkeeping burden it imposes on businesses and government at all levels, costing orders of magnitude more in lost economic activity.
“It seemed to be a common-sense way to collect back taxes that was passed in the dead of the night. Once the onion was peeled back and once the unintended consequences were exposed through the years, this thing was seen for what it is — it was a jobs-killing, economy-killing effort … that would cost more than it would actually bring in,” said Giovanni Coratolo, vice president of small-business policy at the U.S. Chamber of Commerce, part of a coalition of 170 organizations fighting for a repeal.
The withholding story is a cautionary tale as both parties once again look to trim the deficit, and have tasked a supercommittee with coming up with savings — and the 12 members once again are eyeing savings from waste, fraud and abuse.
It seemed like a good idea in 2006, when all sides were looking to cut the deficit and saw opportunity in the tax gap: the hundreds of billions of dollars the Internal Revenue Service says it is owed, but hasn’t been paid, by individual and corporate taxpayers alike.
A 2007 Government Accountability Office report found federal contractors alone were nearly $8 billion in arrears. Withholding 3 percent of government contracts, just as the IRS withholds personal income taxes during the year, seemed to be a good solution to raise money. The increased revenue was counted on to offset part of the $70 billion in tax cuts passed in the 2006 Tax Increase Prevention and Reconciliation Act, and was slated to begin in 2011.
But since then, with businesses howling about increased costs and governments warning that they don’t know how to administer it, the IRS has delayed the requirement until 2013.
A memo from the Pentagon during the Bush administration said administering the program could cost the Department of Defense alone $17 billion in the first five years — or more than the $11 billion in higher revenue the 3 percent withholding would bring in over its first 10 years.
Republicans and Democrats alike now say they want it gone. President Obama in his jobs plan said he wanted to delay it; Republicans upped the ante by saying they wanted to repeal it altogether, and Mr. Obama agreed.
The sticking point is how to pay for it. Even though it could cost more to implement than it would save, lawmakers still must find offsetting cuts to make it score as budget-neutral under Congressional Budget Office (CBO) rules.
Senate Republicans last week offered a bill that would have directed the White House to cut $30 billion in discretionary spending over the next decade to pay for it, mustering 57 votes of support — three shy of the 60 needed to advance in the upper chamber. Mr. Obama earlier in the day had threatened to veto the plan, saying discretionary spending can’t survive any more cuts.
“The bill’s unspecified rescission of $30 billion in appropriated funds would cause serious disruption in a range of services supported by the federal government,” the White House said in its statement of policy.
House Republicans will act this week, pursuing a two-bill package: One would repeal the withholding requirement, while another would change the rules on Medicaid and health exchanges, which should save enough money to cover the costs of the withholding repeal.
The withholding has been compared to the Form 1099 business-expense reporting requirement that was one of the ways Democrats paid for the health care legislation enacted last year. It would have required businesses to report every contractor or corporation with which they did more than $600 of business in a year.
Faced with an outcry from small businesses, Congress rushed to repeal it earlier this year.
Budget watchdog groups question the move.
“There’s always a balance between the burden and cracking down on tax cheaters,” said Chuck Marr, director of federal tax policy for the Center on Budget and Policy Priorities. “In the last 18 months, we’ve seen the balance tipping in favor of the tax cheaters.”
He said there are two big ways to lower the tax gap: Withhold taxes or get more information. The 3 percent requirement would have been the former, and the 1099 reporting would have been the latter.
The rethink of potential savings comes as lawmakers, as in 2006, are trying to squeeze savings out of waste, fraud and abuse.
During this year’s spending and debt fights, Democrats said there was enough room in waste to make a dent in the deficit. More recently, members of the supercommittee charged with finding at least $1.2 trillion in deficit reductions said they think there’s room to explore there.
“We hear a lot of talk about waste, fraud and abuse. It’s a trite phrase, but the reality is there’s a significant amount of truth to it,” said Sen. Jon Kyl, Arizona Republican, at the first public hearing of the supercommittee, pointing to Medicare fraud and overpayments as particularly ripe for the committee’s scrutiny.
Douglas W. Elmendorf, who as CBO’s director is the chief scorekeeper for Congress, quickly cautioned that such savings can be tough to isolate, and will not be able to produce the kind of money lawmakers are seeking.
“We have done a fair amount of work, we’ve given testimony on this topic, and there is no evidence that the amount of savings or extra revenue that could be reaped by the government through efforts in this direction could represent any substantial share of numbers that begin with ‘t’ for trillion,” he told Mr. Kyl.
• Stephen Dinan can be reached at email@example.com.
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