Why Didn't the 3 Percent Rule Get Repealed?

Democrats and Republicans both oppose the law. But they didn't repeal it when they had the chance Thursday.
by | October 21, 2011
 

Last night, state and local governments lost out on $35 billion that would have been made available for teacher and first-responder salaries when the Senate failed to pass part of President Obama's jobs bill on its own.

That vote wasn't a surprise, with senators largely casting their votes along party lines.

But states and localities also lost out a second time. Given less attention was the Senate's failure to pass the Republicans' counter-proposal, a bipartisan plan to rescind the so-called 3 percent withholding requirement.

The existing law, set to take effect in 2013, requires all levels of government to withhold 3 percent of each payment above $10,000 they make to vendors, and then hand it over to the IRS. Businesses would then get that money back, eventually, in the form of a tax credit on their annual tax bill.

The rule is designed to ensure that businesses that work with governments are paying their federal taxes. The plan is widely opposed by state and local leaders, who say vendors would simply charge them more money rather than wait around for their credits. Businesses oppose the law, because they say it amounts to an interest-free loan given to the federal government.

Legislation to repeal the plan has received bipartisan support, and last week, a House committee approved one version on a voice vote.

But when Senate Republicans introduced their version of the legislation Thursday, following the failure of the administration's jobs bill, it was denied, falling three votes shy of the threshold needed to force an actual yes-or-no vote on the issue.

A nearly identical bill introduced by Sen. Scott Brown (R-Mass.) earlier this year included a half dozen Democrats among its cosponsors. So what happened?

A Congressional Budget Office analysis released earlier this week found that repealing the withholding rule would reduce revenues by $11.2 billion over the next 10 years. The Republicans' legislation, introduced by Sen. Minority Leader Mitch McConnell, would pay for the plan by making $30 billion in unspecified budget cuts.

The Obama administration threatened to veto the proposal, saying in a statement that it supports repealing the withholding requirements, but not the $30 billion in cuts. Those, the statement said, run counter to the debt deal reached earlier this year, in which the government agreed to cut spending by about $1 trillion over the next decade.

"Disregarding the [Budget Control Act] agreement and cutting already-tight discretionary program levels even further, as this bill would do, would be a serious mistake," the administration wrote.

And just like that, not one, but two proposals that could have aided state and local leaders was gone, due largely to congressional politicking.

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