House Ways and Means Chairman Dave Camp (R-MI) has said that he wants to explore repeal of the requirement that Federal, state, and local governments and their instrumentalities – including pension plans -- withhold 3% from payments for most goods and services which is currently set to take effect on January 1, 2012. Although the withholding requirement does not apply to retirement benefits, other pension plan payments could be affected. Legislation to repeal the provision has also now been introduced in both the House and Senate, and NCTR has recently joined a dozen other State and local government organizations in urging Chairman Camp to immediately address the issue, We thank you for recognizing the problematic nature of this provision and ask that you address this issue immediately, as State and local governments must start spending scarce resources now in order to accommodate the impending January 1st deadline.
Section 511 of “Tax Increase Prevention and Reconciliation Act” (P.L. 109-222) was a last-minute provision added to raise revenue during the 11th hour of conference negotiations on the 2006 legislation. It requires withholding at a rate of 3% on all government payments for products and services made by the Federal government, state governments, and local governments with expenditures of $100 million or more. The withheld amounts will be a credit against the tax liability of the recipient, and will be shown on an information return after the end of the tax year, similar to backup withholding or withholding on wages. Originally set to apply beginning in 2011, a one year delay was included in the 2009 American Recovery and Reinvestment Act.
While the 3% withholding requirements would not apply to the payment of pension benefits, they would appear to apply to a number of pension plan activities, such as consultant contracts, fees paid to money managers, and payments to healthcare providers where the plan administers health benefits.
Legislation to repeal Section 511 has now been introduced in both houses of Congress. Congressmen Wally Herger (R-CA) and Earl Blumenauer (D-OR) introduced H.R. 674 on February 11th, and the measure currently has 41 other bipartisan cosponsors. In the Senate, there are two bills: S. 89, introduced by Senators Vitter (R-LA), Burr (R-NC), Inhofe (R-OK) Isakson (R-GA) and Wicker (R-MS), and cosponsored by Senators Cochran (R-MS) and Johanns (R-NB); and S. 164, introduced by Senators Brown (R-MA) and Snowe (R-ME) and cosponsored by Senators Klobuchar (D-MN), Thune (R-SD) and Collins (R-ME).
NCTR, along with other State and local groups, continues to push for repeal of the withholding requirement. Following a recent speech by House Ways and Means Chairman Dave Camp (R-MI), in which he said that he wants to explore repeal as well, and that it could possibly be included as part of a larger tax bill that could be moving later this year, NCTR and NASRA have joined with other governmental organizations, spearheaded by the National Association of State Auditors, Comptrollers and Treasurers (NASACT), in sending a letter to Chairman Camp urging prompt action.
“State and local governments face unique challenges in preparing to implement Section 511, as the sophistication of systems necessary to capture and report the required data vary greatly between governments and most entities do not have the resources, capacity or staff to undertake the required withholding and remittance,” the letter notes. It also underscores that the costs to purchase or retrofit existing payment and procurement systems “are particularly concerning in light of the current state and local government fiscal situation.”
Repeal of the legislation has always been problematic due to the loss in Federal revenues that the measure purportedly is expected to raise. However, while it was estimated to “increase” revenue by $7 billion from 2011 to 2015 when originally adopted, $6 billion of this total was projected to occur in the first year solely due to accelerated tax receipts and not from new revenue as the result of “improved tax compliance.” Furthermore, the Department of Defense -- the withholding would apply to all Federal agencies – has estimated its compliance costs alone to be $17 billion over the first 5 years of enforcement. Finally, final regulations have not been issued from the Department of Treasury yet.
No hearings have yet to be scheduled on the repeal legislation, however, in either the House or Senate.
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