[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON THE NEW HIDDEN TAX ON SMALL BUSINESS
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 22, 2007
__________
Serial Number 110-10
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
JUANITA MILLENDER-McDONALD, STEVE CHABOT, Ohio, Ranking Member
California ROSCOE BARTLETT, Maryland
WILLIAM JEFFERSON, Louisiana SAM GRAVES, Missouri
HEATH SHULER, North Carolina TODD AKIN, Missouri
CHARLIE GONZALEZ, Texas BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington MARILYN MUSGRAVE, Colorado
RAUL GRIJALVA, Arizona STEVE KING, Iowa
MICHAEL MICHAUD, Maine JEFF FORTENBERRY, Nebraska
MELISSA BEAN, Illinois LYNN WESTMORELAND, Georgia
HENRY CUELLAR, Texas LOUIE GOHMERT, Texas
DAN LIPINSKI, Illinois DEAN HELLER, Nevada
GWEN MOORE, Wisconsin DAVID DAVIS, Tennessee
JASON ALTMIRE, Pennsylvania MARY FALLIN, Oklahoma
BRUCE BRALEY, Iowa VERN BUCHANAN, Florida
YVETTE CLARKE, New York JIM JORDAN, Ohio
BRAD ELLSWORTH, Indiana
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania JIM JORDAN, Ohio
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
WILLIAM JEFFERSON, Louisiana DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin SAM GRAVES, Missouri
YVETTE CLARKE, New York TODD AKIN, Missouri
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
(ii)
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
WILLIAM JEFFERSON, Louisiana LYNN WESTMORELAND, Georgia,
RICK LARSEN, Washington Ranking
DAN LIPINSKI, Illinois BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois STEVE KING, Iowa
GWEN MOORE, Wisconsin MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania VERN BUCHANAN, Florida
JIM JORDAN, Ohio
______
Subcommittee on Urban and Rural Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DEAN HELLER, Nevada
HANK JOHNSON, Georgia DAVID DAVIS, Tennessee
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
JUANITA MILLENDER-McDONALD, LOUIE GOHMERT, Texas, Ranking
California LYNN WESTMORELAND, Georgia
CHARLIE GONZALEZ, Texas
RAUL GRIJALVA, Arizona
(iii)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
WITNESSES
Iannelli, Vincent, Associated General Contractors................ 4
Deel, Daryl, American Trucking Associations...................... 5
Whitman, Lamar, Computing Technology Industry Association........ 7
Kahn, Chip, American Federation of Hospitals..................... 9
Coleman, Lonnie, Coleman Spohn Corporation....................... 11
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 30
Chabot, Hon. Steve............................................... 32
Altmire, Hon. Jason.............................................. 34
Iannelli, Vincent, Associated General Contractors................ 35
Deel, Daryl, American Trucking Associations...................... 43
Whitman, Lamar, Computing Technology Industry Association........ 46
Kahn, Chip, American Federation of Hospitals..................... 55
Coleman, Lonnie, Coleman Spohn Corporation....................... 61
Statements for the Record:
Associated Builders and Contractors.............................. 67
American Congress on Surveying and Mapping....................... 75
Aerospace Industries Association................................. 76
American Farm Bureau Federation.................................. 78
American Moving and Storage Association.......................... 80
American Road & Transportation Builders Association.............. 82
American Supply Association...................................... 84
American Society of Civil Engineers.............................. 86
Construction Financial Management Association.................... 88
Construction Management Association of America................... 92
The Coalition for Government Procurement......................... 94
Contract Services Association.................................... 96
Donald Alexander, Akin Gump Strauss Hauer & Feld LLP............. 98
Electronic Industries Alliance................................... 100
Government Withholding Relief Coalition.......................... 105
Government Finance Officers Association, et al................... 109
National Electrical Contractors Association...................... 111
Small Business & Entrepreneurship Council........................ 114
(v)
FULL COMITTEE HEARING ON THE NEW HIDDEN TAX ON SMALL BUSINESS
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THURSDAY, MARCH 22, 2007
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360 Rayburn House Office Building, Hon. Nydia Velazquez
[Chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Shuler, Cuellar,
Altmire, Braley, Ellsworth, Chabot, Musgrave, Westmoreland,
Fallin, Buchanan and Jordan.
OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ
Chairwoman Velazquez. Good morning. I now call to order
this hearing to examine the impact of a three percent
withholding requirement on all government payments.
Today's hearing focuses on what might seem to be a minor
change in tax law, but will have a huge effect on small
businesses across this country. We will discuss the potential
problems of a provision passed last year that will require the
government to withhold three percent on many government
payments.
While the withholding requirement is not scheduled to
become effective until 2011, it is important to understand the
problems now. This change goes far beyond those who do business
with the federal government. Farmers receiving payments from
the USDA, health care providers who receive Medicare
reimbursement, as well as the thousands of small businesses who
perform contract work for the federal government will all be
hit. This money will be withheld regardless of what you
actually owe in taxes.
This could be an enormous burden for small businesses.
Taking away three percent of revenues can mean the difference
between meeting payroll, expanding a company or buying needed
equipment. It will reduce their ability to compete against
their corporate counterparts.
For small government contractors, the results could be
severe. When you consider that small firms are continuing to be
squeezed out of the federal marketplace, the last thing
Congress should be doing is creating another obstacle to
success. Small firms, which often have fewer resources, may be
unable to afford to stay in the market. If businesses leave the
federal marketplace, there will be less competition, which
could lead to higher prices, costing valuable taxpayers'
dollars.
The change will also have a negative impact on the health
care industry. The sheer volume of transactions affected by
this change creates a huge administrative burden. Hospitals and
small business health care providers conduct millions of
transactions that will be subject to withholding.
I believe the intent of this provision was a good one.
Right now there is a $350 billion tax debt. However, I question
whether this change will really get at that problem. Most of
the revenues generated by this provision do not come from
collecting taxes, but from a budget gimmick. It simply moves up
the collection of money that will have come in the next year.
We must consider the hidden costs of this legislation. We
should not increase the cost of running a business by requiring
an interest free loan to the government. It seems to me that
the most logical step is to repeal the provision. There are
better ways to crack down on those who are not paying their
taxes without creating a hardship on small businesses.
I appreciate the witnesses coming here today to talk about
their concerns, and I look forward to today's discussion.
And now I will recognize the Ranking Member, Mr. Chabot.
OPENING STATEMENT OF MR. CHABOT
Mr. Chabot. Thank you very much, Madam Chairwoman, and
thank you for holding this important hearing to discuss, as you
mentioned, Section 511 of the Tax Increase Prevention and
Reconciliation Act of 2005, known as TIPRA.
I find it truly ironic that legislation that was called the
Tax Increase Prevention and Reconciliation Act, which provides
for lower taxes on capital gains and dividends and that
generally helps small business owners, also contains a
provision added at the 11th hour during a House-Senate
conference committee that will raise taxes on those same small
businesses if Congress fails to take action.
Of course, we hope that Congress will take action.
Section 511 of the Act, scheduled to take effect in 2011,
will require federal, state, and local governments with an
annual procurement budget of at least $100 million to withhold
three percent from all payments for goods and services as a
guard against possible business tax evasion, justification that
I find particularly offensive.
Section 511 will affect goods and services under government
contracts, as well as payments to any person for services or
products provided to a government entity, such as Medicare
payments or certain grants. This provision is based on revenue
from government payments and is unrelated to a company's
taxable income or tax liability.
As I mentioned earlier, it is particularly troubling to me
that Section 511 was inserted in the Tax Increase Prevention
and Reconciliation Act of 2005 during the House-Senate
conference without open debate on the merits. A provision that
will likely have this type of impact on small businesses, as
well as state and local governments and the private sector,
should have been fully considered in both Houses of Congress
with inputs from all sides.
At a time when we are trying to encourage the federal
government to do more business with small businesses, Section
511 is exactly the wrong message to send. Small businesses
typically work with very small margins, and three percent
withheld from any payment affects its operating capital and
could make the different between its ability to submit a bid or
not.
Furthermore, companies of all sizes that do business with
government will likely have to increase prices to account for
this additional burden. The impact of Section 511 will likely
be enormous and far reaching. From the cost of construction
projects to taxpayers, which would likely increase, to the
already low Medicare reimbursement payments to physicians that
will likely decrease, which could cause physicians to stop
accepting new Medicare patients.
Some companies may be forced to pass some of the
withholding amount down to subcontractors. This can be
especially harmful to small businesses down the supply chain.
According to the Congressional Budget Office and the Joint
Committee on Taxation, Section 511 amounts to an
intergovernmental unfunded mandate and would be extremely
expensive to implement.
In many cases, governments and the private sector would
have to adopt new accounting and financial control measures and
perhaps additional personnel to track these payments. In short,
Section 511 hurts honest taxpaying small businesses without
providing any additional enforcement provisions to improve tax
compliance.
Section 511 of TIPRA is bad law and bad tax policy. I want
to again thank the Chairwoman for holding this hearing to
expose the damaging effects this provision will have on small
businesses should Congress fail to take action in the next
several years to prevent it, or should there be an attempt to
expedite Section 511's implementation, as happened last year.
We need to be looking at ways to foster growth and productivity
in the small business sector, not penalize everybody for the
actions of a few.
Madam Chairwoman, thank you again for holding this hearing.
I look forward to hearing from our distinguished panel and
working with you to address this important issue, and I look
forward to introduction, if possible, Mr. Coleman who is from
the great State of Ohio. He does not have the good fortune to
be from Cincinnati. He is from Cleveland, but close enough.
[Laughter.]
Mr. Chabot. I yield back.
Chairwoman Velazquez. Thank you. Thank you.
Our first witness is a constituent from New York, the great
State of New York, Vincent Iannelli. He is the President of
Iannelli Construction Company, Inc., and a member of the
General Building Contractors of New York State, Associated
General Contractors Chapter. Associated General Contractors of
America represents over 32,000 firms throughout the country.
Mr. Iannelli, you will have five minutes to make your
presentation, and I want to excuse myself. I have to go before
Natural Resources Committee to testify on a bill that I am the
lead sponsor. So I will ask for you to excuse me, but Mr.
Shuler will be on the Chair, and I will be coming back as soon
as I finish.
Mr. Shuler. [presiding] Thank you, and you may start.
STATEMENT OF VINCENT IANNELLI, PRESIDENT, IANNELLI CONSTRUCTION
COMPANY, INC. ON BEHALF OF ASSOCIATED GENERAL CONTRACTORS OF
AMERICA
Mr. Iannelli. Thank you, Chairwoman Velazquez and Ranking
Member Chabot, for this opportunity to testify on the new three
percent withholding law.
I am testifying on behalf of the Associated General
Contractors of America, a national trade association
representing more than 32,000 companies. I am Vincent Iannelli,
President of Iannelli construction and a member of the General
Building Contractors of New York State, an AGC chapter.
My father started our company in 1958, and now my brother
Thomas and I are running it. My daughter Carla started working
with us two years ago.
Iannelli Construction is a family business. We are also 99
percent public works.
Small business is big in construction. In 2005, 91 percent
of construction establishments had fewer than 20 employees.
Only one percent had 100 or more. According to the 2006
construction industry annual financial survey, earnings after
taxes in the most recent fiscal year averaged 2.1 percent, up
from 1.6 percent in 2005.
Today, Iannelli Construction works 99 percent on school
construction. We employ six full-time employees in the office
and ten to 20 in the field, depending on how much work we have.
We are 100 percent union, working mostly with the locals from
the Carpenters Union and the Mason Tenders Unions.
All of my public projects have retainage. The public owners
hold back from five to ten percent on each progress payment
until the project has been substantially complete.
In addition, some public owners hold out an additional five
percent of the project for closeout and punch list. It has
taken me years sometimes to receive final payment after the
contract has been completed.
Because these are public projects, all of our jobs are
bonded. Having bonds on projects insures the taxpayers that the
jobs will be completed at no additional cost to the public. The
project must be completed for the price and in the time
negotiated under the contract.
The construction contractor is responsible for purchasing
the bond, and if something happens to the company, the bonding
company liquidates the contractor's assets to complete the
project. The taxpayer is protected.
Contractors must purchase performance and payment bonds for
government projects. The performance bond insures that payroll
taxes will be paid on behalf of the employees working at the
site. If the government determines that payroll taxes have not
been properly withheld and remitted, then the government can
ask the bond provider to fill in the gap. Under the bond
everyone is protected.
Now the federal government has added an additional layer by
requiring three percent holding on payments for goods and
services from every level of government, federal, state, and
local. This new requirement plus the retainage and closeout
costs could add up to 15 percent of every progress payment.
This kind of hit to my cash flow also makes it more costly
for me to purchase the bonds necessary. Many companies who
provide the bonds study my books in detail before offering
coverage. Based on past performances, the ability to perform
the work for which I bid and my cash flow assurity gives
Iannelli Construction a bond rating which governs the price of
the bonds and how much bonding coverage I can receive.
This is just one of the reasons why cash flow is so
important. Another is my ability to pay my suppliers,
subcontractors and service providers. Some suppliers ask for
payment up front, which means I am paying for things before
being reimbursed by the government.
What is frustrating is the government is penalizing good
contractors for paying their taxes and paying their payroll
taxes in a timely manner. There should be a better way to do
this.
Every couple of years we have to prequalify for certain
government agencies that we do work for, and one of the
questions during the process is if we pay our taxes. The agency
looks into this and someone's tax returns from the previous two
or three years. If you cannot come up with that, you are not
qualified to bid on these jobs. This shuts people down if after
a while they aren't paying their taxes.
The majority of AGC contractors work on some kind of
government contract every year, and this three percent
withholding will have a large impact on the construction
industry.
Again, thank you for this opportunity to testify today on
behalf of the AGC, and I look forward to your questions.
Mr. Shuler. Mr. Iannelli, thank you so much for your
testimony and comments.
[The prepared statement of Mr. Iannelli may be found in the
Appendix on page 35.]
At this time I'd like to introduce Mr. Daryl Deel, the
president of three small business trucking companies and comes
on behalf of the American Trucking Association, ATA. Mr. Dill
is the Vice Chairman of the ATA Tax Policy Committee.
ATA represents carriers of government agencies, and I thank
you for your testimony.
STATEMENT OF DARYL DEEL, VICE CHAIRMAN, TAX POLICY COMMITTEE,
AMERICAN TRUCKING ASSOCIATION
Mr. Deel. Thank you.
And good morning. Again, my name is Daryl Deel. I am a
certified public accountant by training and now I am in the
trucking industry, and I do own three small trucking companies.
I am here today representing the American Trucking
Association, or better known as ATA, and we certainly
appreciate the opportunity to be here today.
My trucking company specializes in transporting highly
specialized security sensitive cargo for the Department of
Defense and the Department of Energy. As a member of ATA, I am
currently the Vice Chairman of the ATA Tax Policy Committee,
and for three years prior to that I chaired the Government
Traffic Policy Committee, which is comprised of motor carriers
and brokers which provide contract services to haul government
freight.
ATA represents the motor carriers who serve government
agencies with the best freight logistics support in the world,
and it takes a lot of money and expertise to provide that level
of service. We take immense pride in the fact that we support
public missions. We are particularly proud to be an
indispensable link in the defense supply chain that sustains
America's war fighters domestically and throughout the world.
Like most businesses and Mr. Iannelli's business, we expect
customers to pay with 30 days or net 30. When a customer has a
good track record of payment, we give them the best rates. When
the government begins withholding the three percent, we are not
going to see that money returned to us for much longer than 30
days.
Depending on the state of the economy, the motor carrier
industry's net profit margins range from one half of one
percent to five percent of revenues, for an average net profit
of about three percent. Therefore, when the government
customers start withholding the three percent of the freight
bill that they owe the carriers, trucking companies may be
compelled to raise rates just to stay whole.
Otherwise, all of that profit margin, that three percent
profit margin becomes unavailable until we file our tax returns
and then maybe get our refund a year later.
And then when the economy is down and suppresses profit
margins for our industry, the three percent withholding will
more than devour all of the net profit for our industry. This
is like a loan to the government. Most small business will not
be able to withstand the negative cash flow impact and could
eventually go bankrupt.
A large company with mostly commercial customers and does
business with governmental agencies, they are likely to be able
to absorb that three percent by just reducing their quarterly
estimated tax payments. So they are paying it one way or the
other way.
But a small company, on the other hand, that does a lot of
business with government customers could suffer that 100
percent withholding of their profit margin and, again, would
have to wait until they file their tax returns and get a refund
the following year.
Worse yet, that three percent withholding could bite into
the cash needed to provide the direct services to the customer.
They have to pay their contractors or their employees, and
their fuel bill, and all of those operating expenses. So the
negative cash flow impact might force a small company, small
business, to either raise its rates, but it may be difficult to
do that in a competitive environment where a larger company can
withstand the cash flow impact of the three percent, and it may
make small business not competitive in vying for government
business.
So it could force the small company to consider leaving
government service and increasing their business with
commercial shippers, those shippers that pay within 30 days,
the full 100 percent of the freight bill.
I do have a simple chart that demonstrates the tax and cash
flow impact of a large business versus a small business for a
motor carrier. With your pleasure, I will submit that for
additional testimony.
For these reasons, I am convinced that if the three percent
withholding is actually implemented that my three small
companies may be compelled to raise rates or to exit providing
service to government agencies. And I believe this is the
opposite to what Congress intended when this new withholding
tax or the bill was enacted.
For these reasons, the motor carriers of the American
Trucking Association urge the members of this honored panel to
support H.R. 1023.
And thank you for the opportunity to be here today. I look
forward to your questions.
Mr. Chabot. Mr. Chairman, I would just move that the chart
that Mr. Deel referred to be admitted to the record, without
objection.
Mr. Shuler. Without objection.
Mr. Chabot. Thank you very much.
[The prepared statement of Mr. Deel and chart may be found
in the Appendix on page 43.]
Mr. Chabot. Mr. Deel, thank you so much for your testimony.
At this time I would like to introduce Lamar Whitman, who
is a public policy manager for Computing Technology Industry
Association, CompTIA. CompTIA has more than 2,000 members in
the information technology industry. This organization is
driven by helping individuals obtain skills necessary to
succeed in the IT industry.
Mr. Whitman, thank you so much for your testimony.
STATEMENT OF LAMAR WHITMAN, PUBLIC POLICY MANAGER, COMPUTING
TECHNOLOGY INDUSTRY ASSOCIATION
Mr. Whitman. Thank you very much for the invitation.
Good morning, Mr. Shuler and Ranking Member Chabot and also
distinguished members of the Committee. My name is Lamar
Whitman. I am appearing today on behalf of the Computing
Technology Industry Association, CompTIA, representing 20,000
member companies.
I want to thank Chairwoman Velazquez and members of the
Committee for holding this important meeting concerning the
effects of this impending three percent withholding. While this
requirement does not distinguish between government payments
made to either large corporations or small businesses, our
comments today will concentrate on the effects of this
provision on our small business members.
The typical small business does not have an IT department,
but relies upon the services of an important segment of the
computer industry referred to as value added resellers, or
VARs. VARs are small system integrators that design, install,
and maintain computer systems and networks for other small
businesses. There are an estimated 32,000 VARs, most of which
are small businesses themselves, sell approximately $43 billion
worth of computer hardware, software, and services annually.
This means that about one third of the computer hardware sold
in the United States is sold by a VAR.
A 2006 government VAR survey found that about half of the
VAR's gross revenue derived from the public sector, which would
put this somewhere in the magnitude of $20 billion annually; of
this, about 37 percent is from sales to federal government; 35
percent sales to state and local governments; and 28 percent
goes to educational institutions.
This three percent withholding requirement is unnecessary
to promote tax compliance and will unfairly penalize compliant
small businesses. First, we must note the unprecedented nature
of this new withholding requirement. Historically, prepayments
of tax had borne some direct relationship to a taxpayer's
estimated tax liability. However, this new three percent
withholding departs from the traditional scheme of federal tax
payments because it bears no relation to the tax liability.
Indeed, a VAR working under a government contract with a
slim profit margin could experience a net loss for the year,
but it would still be subject to the three percent withholding.
With keen competition, VARs operate on a very small profit
margin, often three to six percent and sometimes much less. I
provided two examples in the written testimony. In both
situations, assume the business receives $5 million in
government payments with $150,000 being withheld for this three
percent payment. With a six percent net profit margin, as shown
in the first example, the federal tax liability is about
$100,000. However, $150,000 has been withheld from payments to
that person. So, therefore, they have lost the benefit of
$50,000 in operating capital.
The three percent withholding becomes even more absurd when
applied to a company with a four percent net profit margin, as
shown in the second example. In that scenario, the business
would be deprived of about $90,000 of working capital.
This three percent withhold provision has a regressive
effect, reserving its greatest penalty for those businesses
with the lowest net income, typically small businesses.
In addition to our cash flow concerns, we see a number of
other adverse issues. In subcontracting situations, this three
percent withholding will inevitably be passed down from the
prime to the subcontractor. Without this operating income,
subcontractors will be forced to use credit, incurring interest
costs, and this will, in turn, increase the cost of goods and
services to government purchasers.
We also believe this new requirement will make it much more
difficult for government agencies to meet their small business
contracting goals, something that I know that this committee is
very concerned with.
Further, the three percent withholding on pass-through
entities, such as Subchapter S corporations, partnerships,
joint ventures, whatever, will need to be allocated out to the
shareholders for an S corporation or to the partners in the
case of a partnership. This will further increase the
complexity of return preparation far beyond that of the
contracting entities alone.
The purported justification for instituting this three
percent withholding was that some recipients of government
payments were not reporting and paying their federal income
tax. If, in fact, this is the problem, we believe the proper
and least harmful course of action is to require government
payers to report such payments. The goal here should be to
promulgate effective tax compliance measures, not punish all
government contractors indiscriminately.
CompTIA and CompTIA's members were fully supportive of
efforts to promote tax compliance. However, we object to
unnecessary and harmful tactics, such as this three percent
withholding. This new requirement is unfair to small
businesses, especially of ours, and will force more and more
small businesses out of the competition for federal government
procurement opportunities.
Thank you very much, and I will be pleased to answer
questions later on.
[The prepared statement of Mr. Whitman may be found in the
Appendix on page 46.]
Mr. Shuler. Mr. Whitman, thank you for your testimony.
At this time I will introduce Charles Kahn, who is the
President of the Federation of American Hospitals. FAH is the
national representative of investor owned or managed community
hospitals and health care systems throughout the United States.
Mr. Kahn, thank you for being here today, and we are
looking forward to hearing your testimony.
STATEMENT OF CHARLES KAHN, PRESIDENT, FEDERATION OF AMERICAN
HOSPITALS
Mr. Kahn. Thank you, Mr. Chairman.
And I appreciate the committee holding this hearing today.
It is a pleasure to appear before the committee on behalf of
the Federation of American Hospitals.
We represent approximately 20 percent of the hospitals
across the country that serve our communities. Our members also
pay their fair share of federal, state, and local taxes.
I would like to make four points today. One, the three
percent withhold is unfair because it penalizes all because of
the misdeeds of a few.
Two, the federal health care agency who will implement the
three percent withhold for Medicare, as well as the Medicare
claims payment system itself are ill-suited to adapt to this
kind of requirement.
Three, the health care providers will be harmed by the
three percent withhold and are likely to suffer unanticipated
problems that the framers of the law could not have
anticipated.
And finally, that the GAO report that defines the problems
points to a solution other than the three percent withhold, the
federal payment levy program. We need to give this program a
chance to work before we penalize everyone doing business with
the federal government.
First, let me start off by talking about the providers
themselves. Most health care providers are paid by Medicare
program on a per claim basis, a per service basis. Under Part A
and Part B, hundreds of millions of claims are processed each
year, and a new process will need to be implemented to capture
the three percent withhold for tax paying health care
businesses.
The tax revenue to be generated from three percent withhold
is smaller than most people think after the first year. Yet the
implementation costs to the entire federal government,
particularly to the Medicare program will be enormous and
continue into the future.
The Medicare program currently uses some 40 private
contractors to process Medicare claims. This means the federal
government will provide significant oversight of its
contractors which have different from processing systems to
insure that the three percent withhold is correctly collected.
Another problem involves Medicare claims themselves that
are filed, but frequently need to be amended or refiled. This
common practice usually results in a payment adjustment which
will mean some type of reconciliation on the tax withholding
side will be necessary. It is unclear how this will be
accomplished.
Third, the health care provider community will be unduly
burdened by the three percent withholding and are likely to
suffer unanticipated problems. Medicare providers already
experience slim operating margins, in large part due to the
insufficient levels of government insurance payments. In 2007,
hospitals are expected to experience a negative operating
margin of 5.4 percent on their Medicare business alone.
Withholding three percent of Medicare payments off the top,
regardless of the taxpayer's situation, will exacerbate this
problem and create additional cash flow concerns, especially
for start-up or small businesses that need to maximize cash
flow to survive.
The administrative burden on the health care industry will
be similar to burdens the federal government faces and will
create an expense for businesses that will be unfunded, of
course, by the government itself.
The GAO reports focus on the federal payment levy program
as a solution, which targets delinquent taxpayers by collecting
what they owe from current government payments. The reports
make clear that the implementation challenges remain for the
levy program, and that increased participation by federal
agencies is essential for the program to reach its full
potential.
HHS does not participate in the levy program, but clearly
should be able to capture much of the money that is not being
paid in taxes by this program. Congress should consider the GAO
recommendations on this program and how to improve it and take
steps to insure greater participation by the federal agencies
as a solution to this problem.
So let me reiterate. The Medicare program has millions of
claims that are processed for those who are serving Medicare
beneficiaries every day. To take three percent from those
claims obviously will be extremely complicated and difficult to
implement, and will have effects on those who are providing
those services.
There has got to be a better way, and we believe in the GAO
report their recommendations for a better way to solve this
real problem that our taxing system faces.
Thank you.
[The prepared statement of Mr. Kahn may be found in the
Appendix on page 55.]
Mr. Shuler. Mr. Kahn, thank you.
I will yield to Ranking Member Chabot for the introduction
of Mr. Coleman.
Mr. Chabot. I thank the gentleman very much for yielding.
It is my pleasure to introduce, as I mentioned before, a
fellow Ohioan, Lonnie Coleman who is President and CEO of
Coleman-Spohn in Cleveland, Ohio.
Founded in 1994, Coleman-Spohn Corporation formed as a
result of a merger between a residential heating firm and a
state-of-the-art mechanical engineering company. Today Coleman-
Spohn is a full service mechanical contractor whose clients are
some of Cleveland's most noted public and private institutions.
Lonnie Coleman has received the Small Business
Administration's Award of Excellence and was recognized as its
prime contractor of the year. Coleman- Spohn has been honored
as the Ohio Governor's Minority Business of the Year, the
Environmental Protection Agency's National Minority Contractor
of the Year, and the City of Cleveland's Construction Firm of
the Year.
I am pleased to welcome to the hearing, as I said, Mr.
Lonnie Coleman, and we thank you very much for your testimony
here this morning, Mr. Coleman.
STATEMENT OF LONNIE COLEMAN, PRESIDENT AND CEO, COLEMAN-SPOHN,
ON BEHALF OF THE MECHANICAL CONTRACTORS ASSOCIATION OF AMERICA
Mr. Coleman. Thank you, Representative Shuler.
You have taken the first part of my speech away.
[Laughter.]
Mr. Coleman. Thank you very much.
Good morning to Ms. Velazquez, who has left, and Mr. Shuler
and the Ranking Member Chabot and the members of the Committee.
Thank you for inviting me here today.
My company performs general mechanical and facilities
management contracts as both a prime contractor and a specialty
contractor on federal, state, and local projects throughout
Ohio and in several markets nationwide. And as you have heard
in my introduction from Representative Shuler, we have had some
success on the small business level thanks to many of the
things that the Small Business Committee and Congress have done
in aiding and assisting small and minority businesses
throughout our country.
I am here today representing the Mechanical Contractors
Association of America, a nationwide specialty construction
employer trade association. I am also an officer of the MTA,
serving this year as the Senior Vice President and Treasurer.
A little bit about MCAA. MCAA's 2,300 member companies
install, maintain and service all types of mechanical systems.
The systems range from residential plumbing and heating and air
conditioning systems to more sophisticated piping systems found
in the commercial industrial markets, such as nuclear power
facilities, clean rooms, data centers, and refineries of all
types.
Today I am also privileged to represent five other of our
sister associations, allied in an ongoing legislative campaign
for quality construction. These groups are the Sheet Metal and
Air Conditioning Contractors National Association, the National
Electrical Contractors Association, the International Council
of Employers of Bricklayers and Allied Crafts, the Finishing
Contractors Association, the Association of Union Constructors.
Of these groups, according to the Bureau of Labor
Statistics figures, our group of specialty construction
employers represents the vast majority of industry employment
in our industry and well over 64 percent. In addition, many of
our groups participate in two wider coalitions: the
Construction Organizations for a Sensible Taxation, the
Government Withholding Relief Coalition, both of which are
adamantly opposed to the three percent withholding provisions
of the Tax Reconciliation Act.
Now, what distinguishes our campaign for quality
construction specialty groups is that we employ highly skilled
technicians for field construction under local, multi-employer
collective bargaining agreements with local building trades
unions. Our bargaining agreements come with high value wages,
health and welfare, and pension trust fund obligations for our
employees that require ready cash flow and prompt and reliable
payments.
Moreover, the discipline of operating under collective
bargaining agreements prevents misclassification of the workers
as independent contractors rather than employees. As we all
know, in the construction industry, misclassification is an
area of high abuse and tax avoidance.
Now, we realize that there is a problem here that needs
fixing, but at the same time, we feel the three percent
withholding slated for public contract payments is a bad idea
and is entirely contrary to the small and minority business
development goals of your Committee. This Committee is about
helping, not hindering.
So we ask that you support the repeal bill H.R. 1023 co-
sponsored by Ways and Means Committee members, Representatives
Herger and me.
We also ask that the repeal is done quickly to avoid any
further efforts taken to accelerate the effective date of the
measure for misjudged budget gains and offsets.
Put plainly, fiscal enforcement policy and sound
procurement policies do not and should not be mixed. To be
sure, small and minority owned business enterprises, as well as
all other responsible firms should not have to compete against
firms that have the unfair competitive advantage of undetected
tax avoidance. Burdening tax compliant firms with added
withholding to encourage tax payments by those otherwise
inclined to cheat we feel is just not fair.
And I will tell you our campaign for quality construction
is squarely in favor of closing the tax gap. The taxpayers,
public agencies, and our industry benefit by fair and robust
competition among quality firms that are responsible in all
aspects of their businesses. So if stopping tax avoidance by
public agencies, goods and services providers is the target,
then there are more specific tools to achieve that goal, such
as the contract eligibility process can be tightened up so that
successful bidders or offerors are not awarded contracts unless
they demonstrate, prove and certify tax compliance. In this way
any competitive advantage of tax cheaters id eliminated. The
agency gets quality work by qualified firms, and the added
financing and administrative costs of the three percent
withholding is avoided.
The U.S. Congress has passed two prompt payment laws
recognizing that prompt and fair payment terms are the best way
to administer public contracts and to avoid all the extra costs
and delays that result from less sufficient contract
administrated practices. It really does matter how well firms
are paid and how fairly contracts are administered. Time and
again, it proves out that the best projects are the ones that
are the most competently administered. And all of that matters
even more for small and minority business enterprises whose
margins are thinner and cannot carry the cost of public
contract misadministration the way larger firms can.
And I should point out what makes this issue even more
problematic is the outdated and unfair practice of withholding
five to ten percent retainage from the monthly invoice of
public and private construction contracts without any regard to
performance, as my colleagues have stated.
As a second tier or lower contractor, which many of my
group are, the wait for delays of invoice processing and
payment for only 90 percent of what you put out the previous
month can be very difficult for small, small disadvantaged, and
small minority businesses.
Now, on top of that, the Tax Reconciliation Act would add
an additional three percent deduction even though we have
always paid our taxes on time and our performances have been
entirely up to par.
Members of the Committee, it is a fact that construction
projects are very complex and risky business propositions.
Profit margins are thin. Risks are high, and the competition is
very competitive, and the industry, even with this complexity,
is relatively easy to enter, which makes it an ideal market for
small business.
So the question becomes: who pays for the cost of this
added three percent? Is it the taxpayer? Is it the small or
minority owned business that has to close up shop because it
can't afford the three percent delay in payment?
Ultimately, as taxpayers, we all pay. We will pay with
higher bids to cover increased financing costs, and we will pay
with diminished competition within our industry, and the worst
part is that all of this is completely unnecessary.
Let me be perfectly clear. I am opposed to companies
receiving contracts when they don't pay their taxes. However,
the government already has the information it needs to address
this problem without putting the burden on small businesses and
driving some small businesses out of business.
When I registered in CCR like every other federal
contractor, the government validated my taxpayer identification
number with the IRS. This means that the government had all of
the information it needed for debt collection and could check
at that time to see if I had any outstanding tax liabilities.
When I renew my CCR registry each year, which I'm inclined
to do, the government could again determine whether or not I
had outstanding tax liabilities. I also must supply
representations and certifications whenever I submit a proposal
that includes a statement that I haven't been convicted of tax
evasion. At that time I would be happy to certify that I am
current with my taxes. If done, it would insure that tax
evaders were caught or risk suspension and debarment of false
claims at penalties.
Finally, CCR already shares information with agency payment
systems. If someone does get a contract--excuse me. I am trying
to roll it--and owes tax liability, the government should be
able to withdraw the funds at that time. It is my understanding
that some agencies already do so. The important thing to
remember here is that the government can do all of these things
without it costing law abiding small businesses a single penny.
Member of the Committee, I ask that you help small
businesses. I ask that you help minority businesses by
supporting the repeal bill H.R. 1023.
Thank you, and I am sorry it took a little longer.
[The prepared statement of Mr. Coleman may be found in the
Appendix on page 61.]
Mr. Shuler. Mr. Coleman recognized when there was a rookie
in the chair.
Mr. Coleman. Absolutely, a rookie at the table. [Laughter.]
Mr. Shuler. Well, I want to thank the entire panel for
their testimony today. I, too, can relate to so many of you
having a small business myself, being in the construction
industry, being the health care industry. I, too, can relate to
the added burden that so often is place upon our small
businesses.
And at this time we will move to questions from the
Committee, and I would like to start off by asking Mr. Kahn a
question concerning the health care industry. Can you talk more
about the impact that this rule will have on small health care
providers, especially in the rural areas which I come from?
We have one major hospital and 15 small hospitals, and most
of which are community managed hospitals. Through the paper
work and administrative resources to handle the extensive paper
work, can you tell me, you know, more of the problem and truly
expand on what your testimony has already given us today?
Mr. Kahn. I think if we look at all of the array of
providers, particularly in the rural areas, whether it's the
physicians that generally have small group practices, whether
it's the suppliers, the durable medical equipment, whether it's
the small hospitals in the rural areas, many of whom are for
profit, half of my members have rural hospitals across the
country. We know that the Medicare payments are already sort of
very close to the margin so that these payments, if you deduct
three percent is really like a three percent cut on a payment
that already hardly meets your cost. That's the first issue.
The second issue is just the complexity. The number of
claims particularly for smaller providers who may be seeing a
lot of patients and have a lot of small claims means that
there's a lot of paper work that could be added because of
this, and the question of whether or not the agency can even
handle the administration of this three percent in a fair way,
considering the way that claims are frequently refiled and re-
adjudicated and payments are made and then payments sort of go
back and forth between the providers and the CMS, the agency
that administers this program, is mind boggling.
So I guess the first question here is did those who wrote
this particular law even understand the implications for
Medicare and for the Medicare beneficiaries, as well as those
providing services, and did they--and I do not think they did--
even talk to the agency that would have had to administer this
program?
So one of the reasons that we are so fervent in our support
for repeal is that we're not sure this is the kind of law that
can even be administered fairly. In the contracting area, my
fellow witnesses brought up all kinds of issues that arise, but
here there's a basic contract, but this is a fee for service
environment. It's an environment in which a provider is
providing a service and then expects to be paid, and it's even
different than the contracting environment where you can
anticipate some of the effects, albeit the problems it raises.
Mr. Shuler. Thank you.
Mr. Whitman, I was wondering if you know of anything
preventing the IRS from determining what amount has been paid
to the government contractors or which businesses are receiving
these Medicare or AG and contracting payments.
Mr. Whitman. Is anything preventing the IRS?
Mr. Shuler. Yes.
Mr. Whitman. Well, currently there is no reporting is my
understanding. There is no reporting that these payments made
by the federal government or by the state governments. Some of
my members have told me that when they're dealing with counties
that some counties do provide a 1099; some don't. Some just
decide to err on the side of safety and provide this, but there
is no reason that governments couldn't simply report these
payments that are being made. Therefore, the IRS could
determine whether the income is reported, and that's the
complaint. Is the income reported?
Mr. Shuler. If you could give just one outside of just
repealing the rule altogether, you know, that I can go back to
my district and when I talk to my hospitals or my contractors
or the people, this could be open for any of the members on the
panel. If there was one thing that I could say because most of
it is not being able to understand the rules, first of all,
from so many of our people that say this is an added tax on and
continuation of taxes and taxes and taxes pushed down; is there
one thing that could help me when I am talking to my small
businesses and groups, whether it be a trucking industry or
whether it be a construction industry, that can also help us be
more clear about how this tax is implemented and the reason and
the major impacts that it causes in your small businesses?
Mr. Whitman. I am sorry. To explain it more thoroughly?
Mr. Shuler. Yes, yes, absolutely.
Mr. Whitman. Well, I do not really look upon it as a tax. I
look upon it as a penalty for doing business with the
government, so to speak, that you lose your cash flow. It is
considered to be a prepayment of tax because it is being
withheld for federal tax payment.
But we already have systems for doing it now. We have the
estimated tax system where corporations estimate their tax
liability possibly on a quarterly basis, go back and revisit,
and make quarterly tax payments. This is just something on top
of that that's unnecessary.
Mr. Shuler. Right. Thank you.
I yield back.
Chairwoman Velazquez. [presiding] I now recognize the
Ranking Member, Mr. Chabot.
Mr. Chabot. Thank you very much, Madam Chair.
I'll begin asking Mr. Coleman, if I can.
You had requested the consideration of co-sponsoring H.R.
1023, which would do away with this completely and as a result
of your request and having studied this pretty closely, it is
our intention to do that. So thank you for bringing that up.
Secondly, you referred in your testimony to the fact that
the construction industry is really keenly competitive and that
construction projects are extremely complex. Again, how would
the three percent withholding affect your ability to, for
example, submit competitive bids?
Mr. Coleman. What happens in our industry, Congressman, as
Mr. Iannelli probably on the panel has stated earlier, we are
already dealing with a ten percent retention, which is deducted
from our monthly invoices on an ongoing basis, and we find that
in the construction industry retentions are just commonplace,
and to put on top of the ten percent a three percent retention,
what it does is it creates a situation that we are taking three
percent out of our pocket to fund this, and so that puts an
added burden on construction companies.
Now, we are already in a fight over this ten percent
retention. We would like to see that eliminated because it was
originally intended to make sure that the workers in the work
place were being paid. Now there is all other types of
protection against that. You have performance bonds. You have
labor material and payment bonds that cover that cost.
So you are taking ten percent, which our margins are tight
already. So if a contractor is bidding a project and he has ten
percent in there for fees, so what you are doing is you are
trading dollars until you get to the very end of a project
where you can realize the ten percent.
But on top of that you take three percent. So I as a
contractor have to go in my pocket and say, ``Okay, Mr. Federal
Government. I will let you hold my three percent until some
time in the future when you are assured that the taxes have
been paid and everything is in compliance. Then you will
release my money.''
That puts an added burden on the contractor, large and
small. It is a burden that we have to deal with, and generally
we are financing retentions anyway. So we have to go out and
find additional financing. If we cannot find the additional
financing to be able to cover the cost of the additional three
percent, you will see many businesses go by the wayside, and I
do not think that is what the Small Business Committee is
about.
I think you guys are here to help, not hinder.
Mr. Chabot. Thank you very much.
Mr. Kahn, let me go to you next. One of the chief
complaints that we hear from physicians and hospitals is the
red tape and the reporting requirements and record keeping, and
you have already touched on this to some extent already. This
three percent withholding provision would be yet another layer
of complexity, and I think perhaps a threat to physicians
participating in Medicare, which is already a problem because
of the reimbursements, etcetera.
Could you comment on that very briefly?
Mr. Kahn. Yes. Well, if we look at the physicians, and
basically all physicians are for profit except a few that may
work in universities, and so they would have three percent more
withdrawn from their fees, and unless Congress acts, and I
assume Congress will, but if it does not, there is a ten
percent real reduction in fees coming January 1 of next year
for physicians.
So this causes a real problem for physician fees that were
already low. It is a bookkeeping issue because Medicare claims
are not simply a claim and then a payment is made. There are
frequently, as I said, all kinds of contentions about the
claims. So getting back your three percent when you file your
taxes and the bookkeeping on that is going to be extremely
complicated.
Finally, Medicare knows physicians, the suppliers, the
hospitals that they do business with. I mean, there are
Medicare numbers each of these people have to have. There are
papers constantly being filed with Medicare. So if IRS can
narrow down these individuals, which they ultimately have to
do, the bad actors, the GAO report shows they can be found. All
you have got to do is have communication between IRS and
Medicare, and Medicare can locate the bad actors and action can
be taken on the bills that they have filed, and those claims
can be held by Medicare, you know, until adjudication.
So this issue of affecting everybody will have
administrative effects. It will have cash flow effects, and it
is a big problem. And, frankly, on the hospital side, 35 to 40
percent of your business is Medicare. You can't walk away from
Medicare.
On the physician side, many communities, depending on the
practice, many physicians today look at Medicare and say, ``Can
I really afford to provide services to Medicare
beneficiaries?'' And this adds sort of another piece to that.
And when it goes into effect in a few years, if the program
continues on the path that it is, it could cause real access
problems for Medicare beneficiaries because more physicians
could say, ``Gee, I am just not going to put up with the
hassle. I cannot afford the cash flow issues or the paper work
issues.''
Mr. Chabot. Thank you very much.
Madam Chair, if I have time for one more question, I'll
just put it to the other three witnesses, if you could all
comment on this briefly.
Part of the SBA mission, as we all know, is to help small
businesses to receive a fair share of government contracts, and
it is not easy oftentimes for small businesses, given the
challenges in contracting with the federal government. Do you
think that small business is likely to increase or even retain
its percentage of government contracts given this new, complex
constraint, and is it possible that small businesses could even
lose some of its current share if this is enacted?
I will start with you, Mr. Whitman and Mr. Deel and Mr.
Iannelli.
Mr. Whitman. Yes, my members tell me this. The situation is
that by taking out the three percent, especially for the
smaller businesses that you mention poses a huge problem with
the cash flow situation for these companies, and so they're
going to have to take a hard look at whether they can do
business with the government with all of the other hoops that
they have to jump through.
So a few people have told me, and we have discussed this in
our small business committee, that they definitely would shy
away from doing business with this provision.
Mr. Chabot. Thank you very much.
Mr. Deel.
Mr. Deel. My companies compete in the motor carrier
industry, and one of my largest competitors in the segment that
we serve, which is the Department of Defense is a large,
publicly traded company, very well capitalized with a lot of
capacity, thousands of trucks compared to my company of a few
hundred trucks.
They can withstand this three percent more easily than my
company can, and so I would have a difficult time raising rates
if they do not raise rates as well because of this, and so I
would lose competition because we compete. Price is very
important. The lowest price carrier get the bid from the
government, and so I would either have to operate at a lower
margin or lower cash flow or exit the market. It would probably
be difficult to raise rates if our larger competitors do not
because they can withstand the cash flow impact of this.
And I have a lot of competitors that are small like me as
well, who will have the same problem. So, yes, I think the
answer is probably fewer motor carriers vying for the
government business.
Mr. Chabot. Thank you.
Mr. Iannelli.
Chairwoman Velazquez. Would the gentleman yield for a
moment?
Mr. Chabot. Yes.
Chairwoman Velazquez. Mr. Deel, you know, this three
percent withholding applies to prime contractors. So do you
think that a prime contractor will withhold if they are doing
business with a subcontractor? It will push down to the
subcontractor?
Mr. Deel. I think that is certainly possible, and even in
my company I use subcontractors, independent owner-operators
that work for my company, and I would be faced with the
decision: do I carry that three percent burden or do I pass it
on down to that real small business person?
That would be the decision that would have to be made, but
likely I think it is going to go downhill to the lowest common
denominator.
Mr. Chabot. Thank you. I will reclaim my time.
Mr. Iannelli.
Mr. Iannelli. I would love to pass along a three percent on
my future bids, but I know that is never going to happen
because the contracting climate in New York City, there is
always somebody out there who is going to come along and
basically work for less than that.
I think I might move to Ohio though.
[Laughter.]
Mr. Iannelli. Working on ten percent, and I think I would
love to do it. So give me your address and I will be there
tomorrow.
[Laughter.]
Mr. Iannelli. Here I come.
As far as passing the costs down to the subcontractor, and
you also know, too, it could never happen because there's no
legitimate reason for me to tell my subcontractors I am
withholding three percent of your money because they are
worried I am not paying my taxes. It is not going to work.
So it is just a bad situation that I think should not be in
place.
Mr. Chabot. Thank you very much.
Madam Chair, this has really been an excellent panel. So
thank you.
Chairwoman Velazquez. Thank you.
Mr. Ellsworth.
Mr. Ellsworth. Madam Chairwoman, thank you for calling this
hearing. I cannot think of anything that we do in the federal
government, anything that needed a light shown on it, it is
this subject, and I appreciate that.
Mr. Deel, do you pay your taxes on time, your federal taxes
on time?
Mr. Deel. Yes, I do.
Mr. Ellsworth. Mr. Coleman, do you pay your federal taxes
on time?
Mr. Coleman. Yes.
Mr. Ellsworth. Have either of you--sorry.
[Cell phone interruption.]
Mr. Ellsworth. I pay mine on time, too.
[Laughter.]
Mr. Ellsworth. Totally forgot my line of questioning.
Have either of you ever changed the name of your company,
opened a new company and applied for a new TIN in order to
secure a new federal contract or avoid because you had not paid
one, know you cannot get a contract under your old TIN and so
you open a new company or change it in order to get a federal
contract?
Mr. Deel. No, sir.
Mr. Coleman. No, sir.
Mr. Ellsworth. Have you ever heard of that or know of that
to occur, that somebody opens a new company, changes the name,
applies for a new TIN? I think Mr. Coleman alluded to this,
that it occurs.
Does that occur?
Mr. Coleman. Yes, it does.
Mr. Deel. Yes, sir.
Mr. Ellsworth. Would one or both of you touch on what that
is like, how that puts you at a disadvantage? Law abiding, tax
paying companies to compete against a person or a company that
does that and how that puts you at a disadvantage on a federal
contract.
Mr. Coleman. Well, one of the things that it does when it
happens, it basically takes work away from you. You will find
instances where a contractor will do something like that, and I
know an example where it has happened, where you feel that, you
know, you have put together a very responsible organization.
You are paying your taxes. You are employing people. You are
paying good wages, and to have a contractor come by to try and
beat the system like that, all of the good things that you have
done, you know, trying to build and participate and be a part
of the American dream, to just go fall off the table, so to
speak.
And one of the things that in our organization and our
campaign for quality construction that we are trying to do is
lobby Congress to tighten up the contractor responsibility
laws, and if we could get something like that, we could
eliminate this problem. Then you can have capable, qualified,
good contractors performing the services to our government, and
that is what it should be about.
We do not need the competition. We do not mind competition,
but let the competition play on the same field. Let the playing
field be level, so to speak, and that we are all competing
under the same guidelines, the same rules, and we are okay with
that.
I do not mind losing the contract to Mr. Iannelli when he
is out doing the same thing, paying his taxes, you know, doing
the same things that I am doing as an organization. What we do
mind is when you allow someone to not play by the rules, beat
the system and drive legitimate taxpaying contractors out of
business.
Mr. Deel. I agree with all of those comments. It is
certainly troubling to know that businesses or individuals
avoiding the tax that they would otherwise owe by changing
their corporate name or their federal ID number. Those same
kind of individuals are not just avoiding federal taxes. They
are also maybe not paying their contractors or suppliers, and
the list goes on.
Those kinds of people that are unscrupulous are just
disheartening for us that are quality business people. We pay
our taxes and we vie for the business and would like to see it
on a fair, competitive playing field.
Mr. Ellsworth. Certainly they know that if they are not
going to pay their taxes, they can bid that at a lower rate.
Mr. Deel. Absolutely.
Mr. Ellsworth. Well, again, Chairwoman, I appreciate this.
This goes right to the heart, and, Mr. Coleman, you could add
me to co-sponsors on the bill you have mentioned. This goes
right to the heart of what the people in Indiana and, I am
sure, across the country drives them crazy. They do not mind
paying taxes. They mind getting ripped off. You are being
ripped off, and I will do my part.
Thank you very much.
Chairwoman Velazquez. Thank you.
And now I will recognize Ms. Musgrave from Colorado.
Ms. Musgrave. Thank you, Madam Chairman.
And I would like to compliment you on the fact that you are
holding hearings that really get to the heart of what is
affecting small businesses, and I really applaud you for your
efforts.
You know, when we are talking about this mandatory three
percent withholding, it just really illustrates what happens
when you have something done in a conference where there has
not been open debate and then later everybody raises their hand
and says, ``Wait a minute. You know, this is really going to
hit small businesses hard.''
And we are seeing that today, and I certainly will be a co-
sponsor of the repeal. You know, Mr. Chabot spoke with you, Mr.
Kahn, about Medicare providers, the impact on physicians with
paper work, and you know, I am very concerned as the elderly
population increases that we need docs who are going to accept
Medicare patients, and here is one more thing now to put on top
of it that is going to be a disincentive for them, and that
concerns me greatly.
Could someone elaborate for me on the federal payment levy
program and see how this differs from this mandatory three
percent withholding?
Mr. Kahn. Well, in the levy program, they identify the bad
players and in a sense go after them and their payments. It is
a very direct one-two, and at least in terms of our experience
in sort of observing that, we deal with the Department of
Health and Human Services, and they have been very reticent to
get into it, and we think that either the Congress needs to
tell or the administration needs to decide that the HHS is
going to play because clearly in terms of provider numbers and
other information, Medicare has the information to locate
providers and physicians who are not paying their taxes if the
IRS has the information.
So you cannot change a provider number very simply. It is
even more difficult than in the other areas that have been
discussed. So we think it is a question of the government
getting its act together and CMS, the agency that oversees
Medicare being told to do it.
Ms. Musgrave. Thank you for that response.
You know, as I looked at the big picture on this, can any
of you address how this will affect your ability to reinvest in
your business, grow your business and create jobs if this is
not repealed?
Mr. Deel. Well, I will start with my particular companies.
We do a lot for the U.S. government, and that three percent
would amount to for us about a million dollars a year, and that
is one million dollars less that I would have available to buy
tractors or trailers or grow my business, and that's a million
dollars of working capital that I wouldn't otherwise have
available to me.
So, yes, that is a huge amount of money for my particular
group of companies.
Ms. Musgrave. Very dramatic.
Mr. Deel. Yes.
Ms. Musgrave. Does anyone else want to respond to that?
Mr. Coleman. I would. In my company, in the construction
industry three percent could be ten jobs, and we should be at
the point of developing jobs and work for our society.
It also takes away cash flow, and in our business we need
cash flow. We are already dealing, as I said before, with a ten
percent retention which takes away cash flow. So we struggle
with cash flow, and for those businesses that cannot go to a
bank or cannot go to some type of financial organization to get
that finance, they are going to struggle.
They will not be able to grow their businesses. Three
percent to some major corporations may not sound like a lot of
money, but to a small, emerging business, it is a lot of money,
and in my organization ten jobs is a lot of jobs. So it is
going to have a dire effect on cash flow in our organization.
Mr. Kahn. You know, I would like to add that if I
understand the GAO reports, a good bit of the problem is with
payroll taxes. So, one, this does not go to the heart of
payroll taxes, and frankly, in the hospital business, as I
said, we are around 20 percent of hospitals. We are competing
with tax exempt hospitals that do not pay income taxes. So they
will get their full Medicare payment and we will not when the
issue is an issue primarily of payroll taxes.
And anybody who is not paying their payroll taxes is not
just cheating the government. They are cheating their employees
and probably should be hung, particularly if they go out and
spend the money on luxury items and things, which is what the
GAO report concluded.
So I think we need to find solutions to this problem, and I
understand in the GAO report that they just came out with the
other day that five percent of physicians and suppliers being
paid by Part B of Medicare have some kind of problem here, and
that is a big number. It is shocking.
But they should be dealt with. They can be identified, and
taking money away from everyone will put everyone at a
disadvantage.
Ms. Musgrave. Thank you, and I yield back, Madam Chairman.
Chairwoman Velazquez. Thank you.
And now I recognize the gentleman from Pennsylvania, Mr.
Altmire.
Mr. Altmire. Thank you, Madam Chair.
And I want to thank the panel for being here today and for
full disclosure, say that I used to work at the Federation of
American Hospitals before Mr. Kahn was there, but I am glad to
see you here today as well.
My first question is for Mr. Deel, and I just wanted to ask
for my own benefit if you could give me an example of how
withholding three percent of payment is different from
withholding three percent of taxable income from your business
perspective.
Mr. Deel. Well, three percent of the top line, my revenues,
three percent of the gross revenue is entirely different than
three percent of the net. In our industry, take just five
percent is the pre-tax number of the top line. So if the
company has a million dollars a year of gross revenues that the
three percent would come out of, that would be $30,000. If that
company only makes five percent of that million, that is
$50,000 of taxable income and times the tax rate, you can see
there that taking a three percent of the gross top line has no
correlation to what your bottom line may be. It is just a wrong
way of trying to get at the taxes that are not being paid by
companies.
Mr. Altmire. And if we repeal the requirement to withhold
the three percent, how will we be able to offset the cost to
the tax breaks from the original legislation? What would you
suggest?
Mr. Deel. My recommendation would be do what Mr. Kahn has
been talking about and additionally implement a 1099 reporting
kind of mechanism for any government payments to any company,
whether they're large business, small business, sole
proprietary; that there is a mechanism to report to the
Internal Revenue Service. This is a tried and true method of
1099 reporting.
They would know what your federal ID number is. A company
would have to sign a W-9 form certifying what your tax
withholding number is your federal ID number, and at least the
IRS would have the ability to follow and see is this company
either filing a tax return, and if they are, are they reporting
their revenues correctly?
I think the combination of following up and withholding
money from companies that do not pay their taxes that the IRS
knows about is great, and I think additionally there needs to
be reporting similar to when you receive an interest statement
from your bank, a 1099. The IRS checks to make sure you put
that on your tax return.
That would be one relatively simple way of doing it, and it
would only be a burden to the government agency once a year.
They have to keep track of it during the year, but it is just
one piece of paper that has to get sent out, one to the
business owner and one to the Treasury department.
Mr. Altmire. Okay, and for Mr. Iannelli and Mr. Coleman,
you both talked about some of the bonds that are required in
your industry to perform certain types of work, and it seems
that surety bonding would require that they look at your books
to make sure that you are financially solvent.
Can you each discuss with the committee the type of records
that you think they will look at in determining your
eligibility for those bonds?
Mr. Coleman. Well, number one is the financial statement.
They're going to look at the financial statement. They're going
to require audited financial statements. When you reach a
certain level of bonds, they're going to require an audited
statement and you're going to go through a full blown audit to
make sure that you are capable of being able to perform at
whatever level that you're performing at. That's number one,
first and foremost, with those organizations.
And if you don't meet their requirements, chances are you
are not going to get a performance bond, and without
performance bonds, you don't compete in the public environment,
and not only public environment from a federal standpoint, but
you're not going to compete with the local and state
municipalities as well.
Mr. Iannelli. The bonding community in New York City has
dried up considerably. So there are not a lot of places where
your contractor can go for bonds, and they have regulations and
requirements that are about, you know, they basically want to
come over to your house and see how you live.
And my bonding company every year, the financial statement,
wants to check my tax returns and make sure the bottom line or
whatever I said that I grossed on my tax returns is what I'm
saying is the bottom line on my financial statement. So they
check. There are checks and double checks and triple checks. So
there is no way out of it, no way I could not pay my taxes.
Mr. Altmire. Great. Thank you.
I yield back my time.
Chairwoman Velazquez. Mr. Jordan from Ohio, you are
recognized.
Mr. Jordan. Thank you very much.
That is a rookie for you right there.
[Laughter.]
Mr. Jordan. But I do appreciate the panel, and Mr. Deel's
testimony as well. You know, there is nothing like mathematics
to show what is going on. Sometimes politicians are not too
good in that subject, but it is good to have that in front of
us. So I appreciate what you are doing.
This is just, in my judgment, one more example of
government saying we are smarter than the business owner. We
are smarter than the family out there. We want to use your
money for the year instead of letting you use it and invest it
in jobs and business and in our community.
So I think it is a good piece of legislation that we should
pass, and I appreciate the panel's testimony today, and I yield
back.
Chairwoman Velazquez. Thank you.
Mr. Whitman, it seems that the three percent withholding
could have a particularly harsh impact on the tech industry
where start-up costs are high and financing is critical. Do you
believe that this change could have a negative effect on
innovation in technologies because of the unique financing
challenges facing your industry?
Mr. Whitman. Well, when we were talking about research and
development, typically research and development is done by
larger organizations. Our members are typically smaller tech
companies that are the providers of services. So I would not
really speak to whether or not this three percent would affect
innovation.
Chairwoman Velazquez. Mr. Deel and Mr. Coleman and Mr.
Iannelli, maybe the three of you can address my question.
As the tax code has become more complex, so have the
organizational set- ups of small businesses. The structure of a
company can be based on a number of factors, including estate
planning, liability concerns, and partnership sharing. Do you
think this three percent withholding could be particularly
burdensome for certain types of organizations, whether that be
an S corporation, a partnership or some other structures?
Mr. Deel. I had not thought earlier until one of the other
testimonies about the complexities of an S corporation or a
partnership. This money is going to be withheld and sent over
to the Treasury Department, and they are going to have to match
that against the federal ID number, but if the real taxpayer is
a member of an S corporation or a partnership, be the one
paying the tax on the income, how will that match up that they
will be able to get credit on their 1040 tax return when they
file it or the money that was paid in under the corporation's
tax ID number or the partnership's ID number?
That is going to be a nightmare I would just imagine.
Chairwoman Velazquez. Yes. Any other witness who would like
to answer?
Mr. Kahn. Well, I think in the health care situation,
particularly in group practices for physicians or in the
hospital situation there may be subsidiaries that actually
could create a similar kind of situation where some kind of
holding entity is actually paying the taxes and you have got
other entities that now are going to lose money on their
Medicare payment, and the bookkeeping issues, assuming that you
can even locate all of the dollars are going to be a big
problem.
Chairwoman Velazquez. Thank you.
The federal government and I have been particularly on this
issue for the many years that I have been serving in this
committee making sure that small businesses have an opportunity
to do business in the federal marketplace, and in fact, the
contracting goal of the federal government has not been reached
for several years now of 23 percent.
I would like to hear from the witnesses on how they think
this change will affect small business' abilities to get
contracts over large competitors, and do you believe that the
cash flow issue will limit the ability of small contractors to
perform these contracts?
Mr. Coleman.
Mr. Coleman. I think it will limit the ability. We're
talking cash flow in many cases, and any amount of cash flow is
important to a small business. My biggest fear is this three
percent will drive some of your small emerging businesses out
of the marketplace, and I do not think that we really want to
do that.
In our group we feel that this three percent is just a bad
idea, and there has got to be other ways to be able to reach
the goal that you want to see accomplished and closing that tax
gap and not penalize small emerging businesses in the process.
I just think it is a bad idea.
Chairwoman Velazquez. Could the government end up paying
more for contracts because of this change?
Mr. Coleman. They will pay more. They will pay more in
increased costs because those that can finance it are going to
try and pass that cost on to the federal government. You will
pay more with reduced competition because if you drive
businesses out of business, that means you're going to have
less competition in the marketplace for the work that you're
putting out there for bid or for offerors.
Chairwoman Velazquez. Okay. Any other witness? Yes, Mr.
Whitman.
Mr. Whitman. Yes. And for those businesses that are in the
smaller end of the spectrum, as they lose this operating
capital because of the withholdings, they will have to go into
the market to borrow, if in fact they can borrow, and this is
another cost that they will have to pass on to the government.
So, I mean, no matter how you cut it, it's going to be more
expensive for the government, and it's going to be bad for
small business.
Mr. Deel. I can give a recent example how the motor carrier
industry that serves the Department of Defense transportation
needs. Several years ago they made the decision that the way
they would pay the carriers is through a system called
Powertrack. It's through U.S. Bank, and they withhold
approximately two percent from your payment to receive the
funds by electronic wire.
Well, that two percent charge is a very expensive charge
for the cash for that faster payment, and what the industry did
was raise rates by approximately the two percent. That was the
general reaction.
So to answer your question about will the costs go up, it
is likely that they will through reduced competition if some of
the small business goes out and the bigger guys that are left
say, ``Well, we can raise rates now.''
And one further thing I'd like to say is that when I
started my company ten years ago, had this been in place, it
would have been very, very difficult for me to be where I am
today. In those early years cash was very, very tight. Cash
flow was I refer to ``cash is king.'' I could not have grown my
company with this three percent and served the government
market.
Chairwoman Velazquez. Thank you.
I will recognize the gentleman from Georgia, Mr.
Westmoreland.
Mr. Westmoreland. Thank you, Madam Chairwoman.
And I want to say that I look forward to working with you
and the rest of the Committee on repealing this crazy thing,
and I also want to apologize to the people. I am embarrassed
that this was passed during a Republican control of Congress,
and I think this is an example of what happens when we
hurriedly pass some of these big pieces of legislation, two and
three and 400 pages of very technical stuff, and we have a very
short time in which to look at it. Madam Chair, I think this is
one of those things that got past all of us, and especially the
people that are familiar with small business.
So forgive us, and hopefully this year if we can right this
wrong, I think it will be the highlight of my congressional
career in a short three years just to right any wrong, but
especially this one.
[Laughter.]
Mr. Westmoreland. Mr. Coleman, I am a small business guy,
too, and I was in the construction business all my life, a Mom
and Pop guy, and when I was in the state legislature I fought
very hard to make sure that procurement of government contracts
was available to all business, small, large, minority, whatever
the case is. Everybody had an opportunity to do this, and you
know, we passed--I say ``we,'' but I did not have any
responsibility for this--but back in the late 1980s, we passed
a tax called the AMT tax, the alternative minimum tax, and it
was designed to get 150 millionaires who did not pay any taxes.
This year I think it is going to affect 20 million people.
So something that they did to catch 150 has developed into a
bunch of us.
In contract, I think it is the same thing. While their goal
was good and what they wanted to do--well, I do not know that
it was good in what they wanted to do, but it is not small
business' job to enforce the tax codes. Now they are wanting us
to enforce immigration laws, tax code. I mean, I do not know
what else we are going to be responsible for.
But in your testimony, and I read your testimony. I am
sorry I was not here for you to give it, but in reading your
testimony, you said it is anywhere from five to ten percent of
your payment. In a small business cash flow kind of crunch,
that is a lot, isn't it?
Mr. Coleman. Exactly.
Mr. Westmoreland. And I know from my experience in small
business a lot of these large government contracts, I never got
any of them, but--
[Laughter.]
Mr. Deel. You were lucky.
Mr. Westmoreland. Yes, I know I was lucky, yes. I did not
have an opportunity to lose money.
[Laughter.]
Mr. Westmoreland. But three percent was in some cases all
of the profit you were going to make, and I think going back to
what Mr. Deel said, it is going to drive the small guys out of
business, and the guys that had some fat in it that can afford
the three percent will be the only ones left, and then once
small business is driven out of it, then the prices are just
going to escalate at a rapid rate, and I think we are going to
see an outcome that is not going to be good for us all.
But can you speak to what you were talking about as far as
your association of contractors and how you kind of police
yourself, I guess, on this?
Mr. Coleman. Yes, yes. Our association of contractors have
campaigned for quality construction. We like to think of
ourselves as a group that want fair legislation, legislation
that all can abide by, have that level playing field, so to
speak. We want to do the right things.
We pay very good wages. Just about all of our members are
associated with collective bargaining agreements where we
negotiate with the local building trades unions to put forth
some very good packages with health and welfare benefits,
multi-employer pension plans that are portable. The gentlemen
or women in our association are in building trades unions. They
can move from state to state, city to city and work and have
everything travel and go along with them.
And we think that it is a very good situation for all
parties concerned, and we all want to do the right thing. We
all want to pay our taxes. We all want to be good citizens. It
is that when situations are created where that playing field
gets tilted, we're running up here on the Hill trying to meet
with you and your constituents to help get this thing back to
level so that we can all go down the road and do the right
thing for our businesses and for our country by paying our
taxes so that you guys can have the funds to do what you need
to do on the other side back in our district.
Mr. Westmoreland. If you find that level playing field,
take a picture of it because I've been looking for it for
years, and it is always tilted one way or the other.
[Laughter.]
Mr. Westmoreland. I do not know what it is, and I am sure
all of your associations are the same, that you try to police
yourselves. You want to be the blue chip association of
organization where when your members come in they feel like
they have been accredited in some way to be part of it and you
are responsible for people.
Government does not need to be policing it for you. I think
you will do a great job of it yourselves.
Madam Chairman, with that I will yield back and just tell
you that I am looking forward to working with you and see if we
cannot right this wrong.
Thank you.
Chairwoman Velazquez. Thank you.
Mr. Coleman.
Mr. Coleman. Yes, I wanted to make one more point that the
Congressman raised about the five to ten percent retention. I
think to get a clear understanding of what the retention is
about, if we had a million dollar contract, and I billed a
million dollars a month, they are going to take $100,000 of
that million dollars a month away from me, and they are going
to hold that until the completion of the project.
Now, when I buy equipment, materials, and provide labor on
my project, I am not going to pay the labor that I have working
90 percent of what he is due in the week. He will be up here
and you will come and shut me down.
When I buy equipment, if I have to buy a piece of air
conditioning equipment and it costs me $100,000, I have got to
pay that $100,000 right then and there. I cannot pay the guy
$90,000 and expect him not to put a hold or come after me for
the balance of his money.
So that money that we are being withheld, that money is the
type of dollars that we have to go and finance or take out of
our business to be able to make sure that everyone is whole
while we wait in the public environment to the end of the
project to be able to get those dollars back.
And then when you put three percent on top of that, now we
are talking 13 percent. We are not talking ten percent, and
that is what I mean by the effect of cash flow in our
businesses. It is devastating. And if you want to put some
small businesses out of business, then pass this legislation.
That is how devastating it will be to our constituents across
the country.,
Mr. Westmoreland. Can I make one comment to that?
That is a great point about the ten percent retainage
because what we probably need to do is pass some type of
legislation that says the government has to give you back that
ten percent retainage in a timely fashion. Because I know that
sometimes that retainage is tough to get in a timely way, and
you may have to wait 90, 120, six months.
Mr. Deel. Year.
Mr. Coleman. In some cases.
Mr. Westmoreland. Years, and a lot of time that ten percent
is more than your profit; is that not true?
Mr. Coleman. That is true.
Mr. Westmoreland. Thank you, sir.
Chairwoman Velazquez. The time has expired.
I have another question, my last questions, and I want to
address it to Mr. Kahn or Mr. Whitman.
In your testimony you talk about how the budget score of
the three percent withholding requirement was not an accurate
reflection of the effect on the federal budget. So I was hoping
that you could shed some light on why the $7 billion is not an
accurate figure. How much of this is attributable to taxes that
will have not been paid otherwise?
In other words, how much it will actually close the tax
gap?
Mr. Kahn. I think what we were referring to, and this is
something, joint tax, whatever, would reveal. I am not sure
they looked at the Medicare program as one of the sources of
revenue here that would be affected by the three percent, and
there is some evidence to that.
So, one, we think that the estimate understates what would
be collected because you're talking about, you know, three
percent on the Medicare program, which is hundreds of billions
of dollars, and of course, there are tax exempt organizations
that would get the three percent, but they only make up
probably about 35, 40 percent of Medicare spending.
So we think the effect is going to be much greater on
revenues than was anticipated.
Mr. Whitman. Yes. Are you speaking to the fact as to
whether or not this three percent will close the tax gap? Oh,
okay. Fine.
The three percent withholding does not do anything. It is
the reporting of the income that does something. So the IRS can
determine if a contractor, if a person has reported that income
on the return. So if we have that, we do not need the
withholding. Withholding does not close this tax gap in any
fashion. It simply is money that would have been paid at the
end of the year had it been owed.
Chairwoman Velazquez. Thank you.
Well, I want to thank you all for taking time to come here
and talk to us about this important issue, and you know, this
Committee, I want to use it as a vehicle to be able to raise
the profile of the impact of this issue on small businesses. So
I want to thank all of you for your participation, and without
objection members will have five days to submit a statement for
the record.
With that, this hearing is adjourned.
[Whereupon, at 11:36 a.m., the Committee meeting was
adjourned.]