On May 17, 2006, President George W. Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), which included Section 511: “Imposition of Withholding on Certain Payments Made by Government Entities” (the JCT option). This section required 3% withholding on payments for goods and services to contractors made by all branches of the federal government and its agencies and all units of state and local governments, including counties and parishes. Local governments with less than $100 million of annual expenditures were excluded from the withholding requirement. The section also imposed information reporting requirements on payments that are subject to withholding. This section was a revenue offset and was scheduled to take effect on January 1, 2011.
Substantial opposition developed to this withholding provision. Critics argued that the public and private compliance costs were unacceptable, existing IRS enforcement tools were adequate, and privacy would be reduced. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) delayed the implementation of the withholding provision until January 1, 2012. On May 5, 2011, the IRS issued regulations that further delayed the implementation of the withholding provision until January 1, 2013.
In the 112th Congress, four bills to repeal the Section 511 withholding provision were introduced: S. 89, S. 164, S. 1726, and H.R. 674. In addition, S.Amdt. 405 to S. 782, Economic Development Revitalization Act of 2011, would have repealed the withholding provision. The IRS attempted to address concerns about compliance costs by proposing a $10,000 threshold on government purchases from contractors and increasing the number of exemptions.
On September 12, 2011, President Obama proposed the American Jobs Act of 2011, which included a section that would delay implementation of the withholding provision until after December 31, 2013. On September 13, 2011, at the request of President Obama, Senate Majority Leader Harry Reid introduced S. 1549, American Jobs Act of 2011.
On November 21, President Obama signed H.R. 674 (P.L. 112-56), 3% Withholding Repeal and Job Creation Act of 2011, which repealed the 3% withholding provisions and provided tax credits for businesses hiring unemployed veterans. The $11 billion cost of the repeal was paid for by $13 billion from a change in the definition of income for determining eligibility for exchange subsidies, Medicaid, and the Children’s Health Insurance Program.