New Bill Affects How You Reconcile Your Taxes

On May 17, 2006, former President George W. Bush signed The Tax Increase Prevention and Reconciliation Act of 2005 into law. It’s a tax policy that contains around $90 billion in tax reductions as well as about $20 billion of tax increases. TIPRA revisits and addresses provisions and concepts in existing economic policy, including The Economic Growth and Tax Relief Reconciliation Act of 2001, and The Working Families Tax Relief Act and The American Jobs Creation Act of 2004.

Characteristics & Criticisms

Among the numerous sections in the Tax Reconciliation Act, TIPRA extends the reductions in tax rates for capital gain and dividends, tries to give the middle class some relief from AMT (Alternative Minimum Tax), and promotes small business investment by extending the favorable limitations of Section 179.

However, TIPRA has and continues to face serious censure issues. For example, some feel the tax policy places additional tax burden on businesses. The most recent opposition TIPRA is facing comes from the U.S. Chamber of Commerce to eliminate the tax. In union with 40 other business groups, the U.S. Chamber is calling for the tax repeal of a new requirement that mandates federal, state and local governments to withhold 3 percent from payments for goods and services.

The Affects

Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 passed this requirement into law. Under the new tax policy requirement, this unprecedented withholding mandate will affect all government contracts, and other payments, including Medicare and various grants, effective in 2001. The U.S. Chamber of Commerce, along with the Government Withholding Relief Coalition and many other organizations feel there will be serious ramifications if the provision is not repealed.

According to the GWRC, Repeal Section 511 of Tax Reconciliation Act (P.L. 109-222: H.R. 4297), the basis for the opposition is as follows:

“This far-reaching new requirement was inserted as a last-minute revenue raiser into the Tax Reconciliation Act of 2005 that was signed by the President in May 2006. Though different versions of this provision have been discussed the last few years, no committee hearings were ever held. While its supporters argue that imposing withholdings on nonwage payments made by Federal, State and local governments would improve taxpayer compliance, reduce the tax gap, and promote fairness in the tax system, this provision focuses only on payments made by governments unrelated to any tax liability.”

In a letter addressed to Senator Larry Craig, the Government Withholding Relief Coalition expresses their concerns:

“We are deeply concerned about the impact and the unintended consequences of this provision on all companies that receive contracts or other forms of payment from the government. Among other concerns, the withholding is based on revenues from government payments with no relationship to a companies’ taxable income and will impinge on company cash flows needed for day-to-day operations. In addition, the costs to governments at all levels to administer the program will be substantial and the process exceedingly complicated to implement.”

In the mean time, the U.S. Chamber of Commerce continues to make efforts to repeal the Section 511 Tax Reconciliation Act.