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Senate Votes to Repeal 3%Tax Withholding Rule

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The U.S. Senate voted 95 to 0 on Nov. 10 to repeal the 3% withholding mandate. This follows the recent House repeal by a 405 to 16 margin.

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Had the 2009 federal tax withholding measure been allowed to take effect as scheduled in 2013, it could have undermined construction hiring and punished taxpayers, according to multiple industry analyses of the topic.

“An overwhelming, bipartisan majority of Senators understand that repealing the 3% tax withholding mandate is essential to boosting economic growth” says Steve Sandherr, AGC of America CEO. “With construction activity down by $400 billion and the industry’s unemployment rate at 13.7%, the last thing construction employers need is to be forced into giving interest-free loans to the federal government. That is why today’s Senate vote comes as welcome news for construction firms, workers and taxpayers alike.”

“The last things the construction industry needs are measures that will make it harder for construction firms to hire, raise capital, invest in new equipment and, ultimately, succeed,” says Ken Simonson, chief economist for the AGC of America.

Simonson notes that, according to an analysis of new employment data by AGC, 26 states and the District of Columbia added jobs between September 2010 and September 2011 and that construction employment declined in 24 states during the past year and in 22 states and D.C. during the past month.

Industry officials had warned, however, that the construction employment gains would likely have been jeopardized by the federal 3% withholding rule. They noted that the federal rule would force all large municipalities and school districts, all states and federal agencies to withhold 3% of every payment to every contractor until contractors finalize their tax returns for the year.

According to AGC’s nationwide construction industry survey, 55% of construction firms report that public projects accounted for more than half of their revenue in 2010. Meanwhile, 63% of firms report that their average profit margin for public projects was less than 3%. That means the 3% withholding measure would have forced contractors to carry a loss on public work for months at a time, officials say.

Nearly all – 97% – firms reported on the AGC survey that the tax measure would make it harder and more expensive to attract capital and bond projects. In addition, 49% of firms reported the tax measure would have forced them to hire fewer employees while 65% said the measure would have forced them to cut back on equipment purchases.

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