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Tom Donohue: With ‘Solutions’ Like These, Who Needs Problems?

Failure to repeal the 3 percent withholding tax would bring devastating consequences

For years, the U.S. Chamber of Commerce has fought a provision that would give the IRS sweeping authority to hold hostage 3 percent of nearly every business transaction that takes place between the public and private sectors. The 3 percent withholding tax effectively grants the federal government an interest-free loan. Worse still, the costs and burdens of the provision far outweigh any benefits.

Yet lawmakers have repeatedly passed up opportunities to repeal this job-killing mandate. With unemployment stubbornly hovering around 9 percent, and this provision set to take effect in 2013, Washington needs to wipe the 3 percent withholding tax off the books once and for all. Fortunately, lawmakers may finally be on the verge of doing just that.

Why? Much like we saw with the recently repealed 1099 reporting provision, the withholding tax would bring unintended consequences. It would saddle honest businesses, doctors, farmers, and colleges and universities with hefty costs, and it would drive up federal, state and local budgets at a time our nation can ill-afford it.

If the 3 percent withholding is implemented, public schools may not be able to afford the new buses they need. Cash-strapped colleges and universities may need to raise tuition. Building and repairing our roads and infrastructure — something nearly everyone agrees we need to do — would become even more expensive. Doctors and hospitals already frustrated with Medicare reimbursements would find it increasingly difficult to afford treating seniors.

Failure to repeal the provision would hit small businesses the hardest, taking valuable money from their local economies and sending it to Washington. Many of them operate with a profit margin under 3 percent, and their cash flow could be compromised. And funds that could be used for investment, operations and job creation would be diverted to the government’s coffers.

The irony is that the cost to implement the withholding tax exceeds the amount of revenue it is expected to generate. So the federal government would need to cut spending, raise taxes, grow the deficit or do all three to accommodate the provision. And borrowing money to impose a tax on small businesses that would result in the loss of American jobs is just plain dumb.

With “solutions” like these, who needs problems?

With a coalition of 160 organizations behind us, the Chamber of Commerce has pushed for action. The House of Representatives recently passed repeal legislation 405-16. The White House supports repealing the provision. Now, the Senate must act.

Fully repealing the 3 percent withholding tax would bring certainty to small businesses and to workers — and not a moment too soon.

— Tom Donohue is president and CEO of the U.S. Chamber of Commerce.

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