A New Battle Rages in Washington

President’s Message

By Frank Campitelli

In May 2006, the Mason Contractors Association of America’s (MCAA) Director of Government Affairs, Jessica Johnson Bennett, attended a ceremony on the South Lawn of the White House as President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005.

We were very pleased when Bush signed this law, as many of the provisions help small businesses – the tax cuts are meant to put money back into the pockets of individual taxpayers, investors and small business owners. In addition, the legislation includes key provisions that will aid small-business owners, such as mason contractors, in continuing to grow and expand their businesses and help strengthen the U.S. economy.

However, in July, our staff brought to my attention a provision that was inserted into the final legislation, which most members of Congress were not even made aware. Included in the tax package wording is a new requirement mandating a 3-percent tax withholding on the entire contract amount for work performed for federal, state and local government entities. Unfortunately, Bush had already signed the bill into law, and this provision is now part of the already confusing and intricate tax code that takes affect in 2011.

A provision inserted into the final legislation of the Tax Increase Prevention and Reconciliation Act of 2005 is very concerning for mason contractors.

As a business owner, I am deeply disturbed by this new provision, which does not even take into account the profit expected, or even realized, from the contract; it simply applies to the total contract amount. Anyone who has ever secured a contract with a government entity knows that this would be especially onerous for construction services, where the average profit margin is often less than 2 percent.

I am concerned and exasperated about this withholding provision, and I am sure others will join me when they learn of this unfair and unrealistic provision. With all due respect, I am not certain Congress has fully thought through the issues regarding the forthcoming mandate. This provision will just cause more confusion, angst, complexity and unneeded costs for small businesses such as mason contractors.

The key issues Congress should be concerned about include: the impact the 3 percent withholding mandate will have on small business cash flow, and their ability to effectively compete for government contracts. This will take away essential operating funds, which are used to buy supplies, to pay workers, as well as for overall administrative expenses associated with government contracts. In addition, this provision would limit severely the companies that bid on and secure government contracts. To say the least, this provision certainly would not make bidding on a government contract attractive to mason contractors. There also will be the added hassle of bookkeeping, placing yet another burden on the businesses doing the work.

This is a lose-lose situation for taxpayers as well. I fear that businesses contracting with the government will attempt to pass on the cost of the mandate back to the government, rolling it back into the contract and passing it onto the taxpayers. Congress really has to ask itself whether the provision actually will prove to be a revenue raiser for the country, as it is meant to be, or simply cause unintended consequences for small businesses and taxpayers.

The only certainty is that cash flow for mason contractors will likely be negatively impacted as they are forced to overpay their taxes significantly and wait for repayment. Essentially, contractors would be floating the government an interest-free loan for a period of time. While the provision may be designed to enhance tax compliance, its implementation likely will be a significant punishment to contractors who already comply with tax laws. It is unfair to inflict this penalty on contractors who already are in compliance.