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Little-Known Law Could Cost Architects Plenty

April 25, 2007

By Barbara J. Saffir

The American Institute of Architects (AIA) has joined a coalition of more than 60 business groups attempting to repeal a little-known but far-reaching tax law called Section 511. Passed last year, the provision requires federal, state, and some local governments to withhold 3 percent from virtually all government contracts to help cover the contractors’ federal taxes.

Included in the Tax Increase Prevention and Reconciliation Act of 2005, which aimed to cut taxes and boost federal revenue, Section 511 applies to contract payments beginning in 2011. Proponents say it will help the Internal Revenue Service collect taxes and help to recoup $7 billion in unpaid back taxes owed by roughly 60,000 federal government contractors.

“The (IRS’s) National Taxpayer Advocate has repeatedly reported that systematic withholding is the most effective means of supporting and contributing to a taxpayer’s ability to comply with income tax reporting requirements,” states a report authored by the Senate Finance Committee, chaired by Senator Chuck Grassley (D-Iowa).

But critics contend that Section 511 is too costly and could hurt millions of governments and businesses alike. “It’s an ineffective way of dealing with a serious problem,” explains Julie Roin, a tax professor at the University of Chicago Law School. “The only thing the law does is it ensures if companies go belly up before their taxes are paid, there’s some fund which the government can get paid its share of taxes.”

For its part, the AIA worries that the law will hit design businesses hard, especially small ones. “If you’re a single guy or a small firm, that’s going to create a lot of new regulatory headaches for you,” observes Andrew Goldberg, the AIA’s manager of federal regulatory affairs. Although federal regulations have yet to be written, making many details of the law unclear, the AIA is concerned that architects’ cash flow might suffer with 3 percent lopped off their contracts up front. (For corporations, which typically face a 35 percent corporate federal tax rate, 3 percent will represent only a sliver of their tax bills.)

The AIA also says that the public will lose because the law might push some talented architects avoid the new burden by choosing private rather than government building projects.

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Other groups are concerned about who will bear the cost of the new law. Chris Braddock, of the U.S. Chamber of Commerce’s “Government Withholding Relief Coalition,” explains that both businesses and governments will have to spend millions to adjust their accounting systems to accommodate the change. Calling this “an unfunded mandate,” he observes, “it’s not free—it’s not like you click a switch and turn it over and withhold 3 percent.”

Braddock adds that it’s a “steep road to climb to get repeal.” In the current congressional session, 31 senators and representatives—including seven Democrats—have signed on as co-sponsors to House and Senate bills to repeal Section 511. The Senate Finance Committee and the House Ways and Means Committee are reviewing the legislation now—related hearings took place on Capitol Hill last week—but these bills may not make it to a vote. Similar proposals to repeal Section 511 last year never made it out of committee.

 

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