On May 17, President Bush signed the $70 billion Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). The tax bill was designed to provide a short-term solution to the increasing application of the alternative minimum tax and extend for two years, until 2010, the dividend and capital gains tax cuts that were enacted in the 2001 legislation. Also included in the bill were a handful of provisions that significantly impact state and local governments, which are highlighted below.
IMPOSITION OF WITHHOLDING ON CERTAIN PAYMENTS MADE BY GOVERNMENT ENTITIES
At the last minute, a 3 percent withholding and annual reporting requirement for federal, state, and local government contractors was included in the bill. This provision could have a significant financial and administrative impact on many large governments. The legislation states that beginning on January 1, 2011, governments that spend more than $100 million per year on goods and services will need to withhold 3 percent of the payments made to vendors and contractors, and remit that 3 percent to the federal government, similar to the manner in which payroll taxes are administered. The withholding requirement constitutes an unfunded mandate on state and local governments. The Congressional Budget Office estimated the cost to state and local governments for administering the provision would be $62 million (in 2006 dollars) per year.
This provision was not included in the original tax bills passed by the House or Senate, but instead was included in the conference meetings held between the leaders of the two chambers and placed in the final bill at the eleventh hour, one day before the House voted on final passage of the final bill. There are some exceptions to the rule including real property and payments in connection with a public assistance or public welfare program. Due to the vagueness of the legislative language, we have already begun to inquire about these exceptions, and other provisions under this heading that are confusing.
Senator Larry Craig (R-Idaho) introduced the Withholding Tax Relief Act of 2006, S. 2821, that would repeal this provision. The GFOA, along with the National Association of Counties and the National League of Cities, sent a letter to the Senator supporting this legislation. A copy of the letter and a link to the legislation may be found on GFOA's Web site.
As we combat this provision, the GFOA and other local organizations are asking their members for...