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67–299 2011

DEFER NO MORE: THE NEED TO REPEAL THE 

3% WITHHOLDING PROVISION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CONTRACTING AND 

WORKFORCE 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MAY 26, 2011 

Small Business Committee Document Number 112–017 

Available via the GPO Website: http://www.fdsys.gov 


srobinson on DSK4SPTVN1PROD with HEARINGcongress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


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C O N T E N T S 

Page 

OPENING STATEMENTS 

Hon. Mick Mulvaney ............................................................................................... 1 

Hon. Judy Chu ......................................................................................................... 3 

WITNESSES 

The Honorable Wally Herger, U.S. House of Representatives, Washington, 

DC .......................................................................................................................... 5 

Mr. Curtis M. Loftis Jr., Treasurer, State of South Carolina, Columbia, SC ..... 10 

Mr. Brian George, Deputy Director, Office of Cost, Pricing & Finance, U.S. 

Department of Defense, Washington, DC .......................................................... 11 

Mr. Dave McDermott, Director, Standards and Compliance, Defense Finance 

and Accounting Service, U.S. Department of Defense, Washington, DC ........ 13 

Mr. Mike Murphy, President, Turner Murphy Construction, Rock Hill, SC ...... 18 

Mr. Ian Frost, Principal, EEE Consulting, Inc., Mechanicsville, VA .................. 20 

Mr. James M. Gaffney, Vice President, Goshen Mechanical Inc., Malvern, 

PA .......................................................................................................................... 22

Ms. Kara M. Sacilotto, Partner, Wiley Rein LLP, Washington, DC .................... 24 

APPENDIX 

Prepared Statements: 

The Honorable Wally Herger, U.S. House of Representatives, Washington, 

DC .......................................................................................................................... 34

Mr. Brian George, Deputy Director, Office of Cost, Pricing & Finance, U.S. 

Department of Defense, Washington, DC .......................................................... 37 

Mr. Curtis M. Loftis Jr., Treasurer, State of South Carolina, Columbia, SC ..... 44 

Mr. Mike Murphy, President, Turner Murphy Construction, Rock Hill, SC ...... 48 

Mr. Ian Frost, Principal, EEE Consulting, Inc., Mechanicsville, VA .................. 54 

Mr. James M. Gaffney, Vice President, Goshen Mechanical Inc., Malvern, 

PA .......................................................................................................................... 58

Ms. Kara M. Sacilotto, Partner, Wiley Rein LLP, Washington, DC .................... 71 

Statements for the Record: 

Airports Council International-North America ..................................................... 91 

American Farm Bureau Federation ....................................................................... 95 

AICPA ....................................................................................................................... 97

American Healthcare Association ........................................................................... 101 

American Logistics Association .............................................................................. 104 

American Medical Association ................................................................................ 110 

American Trucking Association .............................................................................. 115 

Associated Builders and Contractors Inc. .............................................................. 118 

The Coalition for Government Procurement ......................................................... 126 

CTIA the Wireless Association ............................................................................... 129 

The Computing Technology Industry Association ................................................. 130 

Construction Industry Round Table ....................................................................... 136 

Energy Systems Group ............................................................................................ 139 

The Engineering and Utility Contractors Association .......................................... 141 

Florida Airports Council .......................................................................................... 142 

Government Withholding Relief Coalition ............................................................. 144 

Miami-Dade Board of County Commissioners ...................................................... 150 

National Association of College and University Business Officers ...................... 163 

National Association of Manufacturers .................................................................. 165 

National Association of Surety Bond Producers ................................................... 169 

National Association of State Auditors, Comptrollers and Treasurer ................. 171 


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IV 

National Defense Industrial Association ............................................................... 177 

National Electrical Contractors Association .......................................................... 181 

National Roofing Contractors Association ............................................................. 183 

Orange County Board of Supervisors ..................................................................... 185 

Riverside County Board of Supervisors ................................................................. 187 

Santa Barbara County Board of Supervisors ........................................................

The University of Illinois ........................................................................................ 188 

U.S. Chamber of Commerce .................................................................................... 191 

Women Construction Owners & Executives, USA ................................................ 196 

Women impacting Public Policy (WIPP) ................................................................ 197 

Ventura County Board of Supervisors ................................................................... 198 


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DEFER NO MORE: THE NEED TO REPEAL THE 

3% WITHHOLDING PROVISION 

THURSDAY, MAY 26, 2011 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON CONTRACTING AND WORKFORCE, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Mick Mulvaney (chairman of the Subcommittee) presiding. 

Present: Representatives Mulvaney, West, Landry, Ellmers, Chu, 

Schrader, Kritz. 

Chairman MULVANEY. I am going to call this meeting to order. 

I thank all the witnesses for being here today. We look forward to 

everybody’s testimony. 

I am pleased to spend this, which is my first hearing as a chairman of this Subcommittee, focusing on a government policy that is 

such a bad idea that when it was first enacted in 2006, Congress 

immediately delayed its implementation for five years. And when 

2011 rolled around, Congress again delayed implementation of this 

3 percent withholding requirement for another year. Now the IRS 

is causing further delays of the withholding requirements until 

2013 because, as the IRS says, implementation of it would simply 

be too difficult, even though they have had six years to get ready 

for its implementation. 

Since no one seems too interested in implementing this policy, 

hopefully this hearing can build on this Congress’s successful bipartisan repeal of the 1099 reporting requirements and serve as 

the starting point for a congressional action to repeal this 3 percent 

withholding requirement. The original intent of this withholding 

was to close the tax gap. In other words, 3 percent withholding was 

supposed to reduce the amount of taxes that were owed by government contractors but that went unpaid. So in that sense it is very 

similar to the 1099 reporting requirements that we took up already 

earlier this year in this Committee and that this Congress subsequently repealed. Both the 1099 reporting and the 3 percent withholding requirements sought to close the tax gap through increased 

burdens on businesses of all types. But small business, as so often 

is the case, were hurt the most. 

Small businesses today already operate on thin profit margins 

with little room for any additional withholdings. As has been discussed in this Committee regularly this year, regulatory burdens 

fall particularly harshly on small business. And the 3 percent withholding requirement would be no exception. Many small business 


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contractors, including those folks testifying here today, work for the 

government for less than a 3 percent profit margin. So the 3 percent requirement would force these contractors to wait until the 

end of the year, not only to get their profit but also to cover all of 

their costs. 

Also troubling is the possibility that government contractors will 

not have the funds to pay their subs during a project and will have 

to find outside financing to complete projects. And I think all of us 

who are related or involved in the small business community these 

days know how much fun it is these days to try and get outside 

credit. 

Even worse is the fact that implementing this 3 percent withholding requirement means treating all small businesses and their 

contractors with suspicion. Instead of rewarding those small businesses that choose to compete for and win contracts, the government essentially preaccuses them of cheating on their taxes. The 

government already requires all contractors to certify that they are 

in compliance with federal tax law. So one is left to wonder why 

we assume that they are going to break the law after they win a 

government contract. 

Furthermore, there is a burden—believe it or not, this is so often 

the case in what we do in Washington—there is actually a burden 

on state and local governments as well. I look forward to taking the 

testimony today of the state—of the treasurer from my home state 

of South Carolina as to the impact on the states. And there is a 

very real impact on the states. It is yet another unfunded federal 

mandate in this 3 percent withholding requirement. 

We also have witnesses from the Defense Department with us 

today to testify as to the great expenses that this withholding requirement will impose and how these expenses far exceed any projections for additional tax revenue. It makes absolutely no sense for 

the DOD to spend $17 billion over five years to save less than $6 

billion on the first year and only $200 million a year after that. 

The Joint Committee on Taxation has actually predicted that after 

the first year, all increases in revenues to the government from 

this proposed 3 percent withholding will come from interest that 

the government earns on the withholding. It is essentially forcing 

small business and other contractors with the government to float 

the government an additional 3 percent. It is completely outrageous 

and I look forward to hearing from the small businesses today that 

will testify as to the other ways that the 3 percent withholding requirement will affect them. 

We have three really good panels today, but I also want to acknowledge all of the organizations that submitted information for 

the record. We have over 30 statements and I would love to read 

the list. There are about 35 organizations in here. I mean to slight 

nobody but this really is a who’s who of American small business. 

Everybody who is involved in this industry from A to Z is just 

checked in on this 3 percent withholding bill and I really appreciate the effort that they have made. And this will be extraordinarily helpful to us as this Committee will—the testimony will be 

today in pushing this initiative further through this Congress. 


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Here is how we are going to work it today, folks. Ordinarily—oh, 

by the way, I ask unanimous consent that those be added to the 

record. And hearing no objection, it is so ordered. 

Here is how we want to do it today before I recognize the ranking member. And I apologize for speaking very quickly. It is not 

something ordinarily we do in South Carolina, but I have been informed that we may begin voting today as early as 11:30. I have 

been through enough hearings in Washington to recognize what 

happens when Subcommittee hearings are interrupted by votes, 

which is that nobody comes back afterwards. And especially today, 

given the number of amendments that we may be taking up on the 

floor, these votes may take well over an hour and maybe possibly 

two or three. So in the interest of time we will be asking folks to 

try and stick to the five-minute limit. And we will not engage in 

as much back and forth as you ordinarily might hear from us because we do want to make sure everybody gets a chance to get 

their statements in the record. 

So with that I recognize the Ranking Member Chu for her opening statement. 

[The information follows:] 

Ms. CHU. Thank you so much. I thank the gentleman from South 

Carolina, Chairman Mulvaney, for yielding. 

Today’s hearing will focus on an issue that could impact millions 

of small businesses across the country contracting with the federal 

government. The United States Federal Government is the largest 

purchaser of goods and services in the world purchasing more than 

$425 billion per year. And small businesses play an integral role 

in meeting the needs of the federal government. In fact, federal 

agencies are required to establish contracting goals with a total of 

23 percent of all government buying targeted to small firms. 

Therefore, any policy that could hamper the ability of small firms 

to do business with government must be looked at carefully. While 

there is often little agreement in Congress on many policies, there 

is bipartisan consensus that the issue of the 3 percent withholding 

requirement on all government contracts needs to be addressed. 

The original intent of the law was to prevent government money 

from going to individuals and companies with outstanding tax 

debts. However, as the law was written, the withholding will apply 

to virtually all contractors, even if they do not have a tax liability 

or other delinquency. 

Like the 1099 filing requirement that was recently repealed by 

Congress, the reasoning behind the 3 percent withholding requirement was to increase tax compliance and reduce the tax gap. However, this is another instance where a broad brush approach has 

harsh consequences for small firms. First, 3 percent of a contract 

often represents the estimated profit or operating cash flow for 

small firms in the construction industry. This money could be used 

by contractors to compensate for material costs, supplies, and other 

operating expenses. The withholding requirement will force many 

small firms to divert funds needed to complete a contract, creating 

cash flow problems. At a time when small firms are still having a 

hard time accessing credit from banks, laws like this create another barrier for small firms seeking to do business with the government. The new mandate will have an adverse effect on the 


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smallest of firms since many prime contractors may be compelled 

to pass the costs associated with the 3 percent withholding requirement to their subcontractors. 

Additionally, government agencies have voiced a concern that administering the 3 percent withholding requirement will create more 

costs than benefits. The Department of Defense issued a report 

that implementing this could cost $17 billion for the first five years 

alone, far outweighing the revenue brought in. State and local governments have also actively fought to repeal the 3 percent withholding since it represents an unfunded mandate at a time when 

state and local budgets are stretched to the limit. In fact, many 

state and local agencies do not have the internal processes and systems to withhold payments and track them. Although the implementation of this law has been delayed, now is the time to fully 

repeal this onerous provision. 

At a time when America needs to promote economic activity, the 

3 percent withholding only hampers transactions between businesses and the government. If Congress does not act, businesses 

will face additional paperwork every time they sell goods and services to the government. As the economy continues improving, small 

businesses need to focus on what they do best, developing innovative new services, bringing additional products to market, and creating jobs. And while it is important to enact policies that ensure 

taxpayers are paying their fair share of taxes, overreaching policies 

do not serve that purpose. There is bipartisan support for this repeal and doing so will allow small firms to continue to perform 

quality work on behalf of the public. 

With that I would like to welcome Congressman Herger to the 

Committee, as well as the witnesses who have taken time from 

their busy schedules to testify here today. 

I yield back. 

[The information follows:] 

Chairman MULVANEY. Thank you, Ms. Chu. 

Very briefly, just for the folks who have gathered here and for 

the folks especially who are here for the first time, including the 

folks who are testifying for the first time, why are we here? We are 

here to sort of take the testimony and build a record. It is the job 

of this Committee to take information about Mr. Herger’s bill that 

we will hear about in a few minutes and then make recommendations and report back to the Ways and Means Subcommittee with 

hopes that they will then approve this bill, bring it to the floor so 

that we can vote on it, and then send it to the Senate. 

Towards that end, you saw the book that we have. That is part 

of the record. The other record will be made up today by the testimony of the three different panels. 


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STATEMENTS OF WALLY HERGER, U.S. HOUSE OF REPRESENTATIVES; CURTIS M. LOFTIS, JR., TREASURER, STATE OF 

SOUTH CAROLINA; BRIAN GEORGE, DEPUTY DIRECTOR, OFFICE OF COST, PRICING AND FINANCE, U.S. DEPARTMENT 

OF DEFENSE; MIKE MURPHY, PRESIDENT, TURNER MURPHY 

CONSTRUCTION, ASSOCIATED GENERAL CONTRACTORS; IAN 

FROST, PRESIDENT, EEE CONSULTING, INC., AMERICAN 

COUNCIL OF ENGINEERING COMPANIES; JAMES M. 

GAFFNEY, PRESIDENT, GOSHEN MECHANICAL, INC., QUALITY CONSTRUCTION ALLIANCE; KARA M. SACILOTTO, PARTNER, WILEY REIN, LLP 

Chairman MULVANEY. And our first panelist is our colleague, 

Congressman Wally Herger. He serves on the House Committee on 

Ways and Means. In that role, his primary legislative concerns include security economic growth and encouraging innovation and entrepreneurship by reducing the tax burden on America’s families 

and small business. He is also interested in making government 

run more efficiently by reducing federal regulatory burdens and 

spending and responsibly reforming entitlement programs to make 

them sustainable and ensure that they will be around for the future generations. 

Congressman Herger is the sponsor of H.R. 674, of which I am 

proud to be a co-sponsor, and which seeks to repeal the 3 percent 

withholding provision which is the bill we are here today to discuss. 

Congressman, welcome. And we look forward to your testimony. 

STATEMENT OF WALLY HERGER 

Mr. HERGER. Chairman Mulvaney, Ranking Member Chu, and 

members of the Subcommittee, thank you for holding this hearing 

on the need to repeal the 3 percent withholding tax on government 

contracts. 

As someone who has been passionately opposed to this tax from 

the day it was first signed into law, I am encouraged by the Committee’s interest in this issue. Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 requires government agencies at all levels—federal, state, and local—to withhold 3 percent 

of payments for goods and services effective in 2012. The Internal 

Revenue Service has recently issued regulations delaying this requirement until January 1, 2013, but agencies and businesses must 

still plan for it to eventually take effect. The breadth of this 3 percent withholding tax is truly astounding. It affects everyone, from 

the manufacturer who builds tanks for the Army, to the nursing 

home that cares for poor seniors on Medicaid, from the construction 

workers who repair roads and levees, to the commissaries that sell 

groceries to families on military bases. 

As the members of this Subcommittee are well aware, small businesses are the lifeblood of our economy. I come from a small business background myself, so I have firsthand knowledge of how our 

country’s entrepreneurs and job creators are burdened by a complex tax code and cumbersome regulations. If the 3 percent withholding tax is permitted to go into effect, it will only add to that 

burden. Many businesses that contract with the government operate on very narrow profit margins, often less than 3 percent. As a 


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result, this tax will create serious cash flow problems for small 

businesses. 

Today our economy is in poor condition. The stock market may 

have improved from the low point of the recession but for most 

Americans the signs of recovery have been few and far between. 

Millions of people are still without work. In my Northern California 

congressional district, some counties have more than 20 percent 

unemployment. Government regulations and taxes that were a bad 

idea even in happier times are absolutely disastrous when our 

economy is struggling to recover and create jobs. 

In addition to its impact on small businesses, the recession has 

also taken a toll on state and local government finances. Cities, 

counties, and states across America are struggling to balance the 

budget without raising taxes or slashing vital services. The 3 percent withholding tax would worsen this fiscal crisis by creating new 

administrative costs and potentially raising procurement costs for 

state and local governments. 

Supporters of the 3 percent withholding requirement have billed 

it as a tax-compliance measure. Yes, it is a problem when government contractors do not pay their taxes. But instead of slapping a 

new tax on everyone, a tax that will actually cost the government 

more to collect than it raises in revenues, we could simply stop 

awarding government contracts to people who cheat on their taxes. 

In fact, since the 3 percent withholding provision became law, OMB 

and Treasury Department have announced several initiatives to do 

just that. Hopefully, these new compliance measures will provide 

the final push for Congress to repeal 3 percent withholding once 

and for all. 

Again, I appreciate the opportunity to testify this morning, and 

I look forward to working with the chairman and other members 

of this Committee to move ahead with repeal. 

[The statement of Mr. Herger follows:] 

Chairman MULVANEY. Thank you, Mr. Herger. Very briefly, I 

have one question. It just came up and was presented to me a day 

or two ago when I was talking about this bill. 

And I think there was a GAO report that came out last week or 

early this week that indicated that there were as many as 37 recipients of grants or contracts under the Recovery Act who owed 

taxes. Thirty-seven hundred folks who got government contracts or 

government grants under the stimulus program actually owed 

taxes. And I think the total amount that they estimated that they 

owed was $750 million. So the question was put to me and I will 

put it to you, which is against that background, why is this bill still 

a really good idea? 

Mr. HERGER. Well, again, I do not think it is—first of all, everyone should be paying their taxes and we should be moving in a judicious way that makes sense to ensure that those who are not 

paying their taxes do. We might point out this is a small percentage that do not pay their taxes. We should not be penalizing the 

masses who do pay their taxes just for those who are not. I believe 

the government has taken steps to correct this. We need to take 

further steps. As a matter of fact, one quarter of those who did not 

pay their taxes we were able to find out and we were able to deal 


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with and again, there are more judicious ways to do this than penalizing everyone. 

Chairman MULVANEY. Thank you, Mr. Herger. I yield now to Ms. 

Chu for any questions. 

Ms. CHU. Congressmember Herger, the repeal of the 3 percent 

withholding seems to have broad bipartisan support. It is clear that 

both parties want this fixed and small businesses want it done 

quickly. And the title of this hearing is Delay No More: Repeal. So 

when does your Committee anticipate marking up this bill or taking any other substantive action to repeal it? 

Mr. HERGER. Chairman Camp, chairman of the Ways and Means 

Committee, has indicated his support. As you know, there is a lot 

going on in Ways and Means now with health care and a number 

of other areas. So we are—the fact that we are having this hearing 

today, the fact of the growing support around the nation I think 

helps put this more to the importance of bringing this sooner than 

later that we will have a markup on it in Ways and Means. 

Ms. CHU. Chairman—well, I actually have another question. 

Congressman Herger, we know that when companies do not pay 

their fair share of taxes it creates an unlevel playing field. I believe 

this measure was enacted as a tax gap proposal. Do you believe 

that there are measures that could be put in place to close the tax 

gap and help level the playing field for honest small businesses? If 

so, could you share some of those with us? 

Mr. HERGER. Absolutely there are. And I think we are moving towards it now. As I mentioned, one-quarter of that amount that we 

indicated that had not been paid, by new measures that have been 

put into place we have already been able to determine those onequarter. And we need to continue taking stronger measures. But a 

measure like the 3 percent, that penalizes everyone. The masses 

who are paying their taxes is not the way to go about this and we 

need to keep the pressure on so that everyone pays their taxes. 

Ms. CHU. Thank you. I yield back. 

Chairman MULVANEY. Thank you. I recognize the gentleman 

from Florida, Mr. West, for up to five minutes. 

Mr. WEST. Thank you, Mr. Chairman. 

My colleague, Mr. Herger, I only have one question. You know, 

having served 22 years in the United States military and retiring 

thereof, and of course when you talk about the effect upon commissaries and exchanges, do you see that possibly with this 3 percent withholding tax, that the Department of Defense may then 

push the cost against the individuals who are using the commissary and exchanges to include our retiree community? 

Mr. HERGER. I do not think there is any doubt about that. This 

will increase the cost to commissaries and I am sure that this 

cost—it would be very difficult. As you know, the military is running very frugally now and I think it is very likely that these costs 

will be passed on. And therefore, our men and women in the military will have to pay more than they would otherwise. 

Mr. WEST. Thank you, Mr. Chairman. I yield back. 

Chairman MULVANEY. Thank you. I recognize the gentleman 

from Louisiana, Mr. Landry, for up to five minutes. 

Mr. LANDRY. Mr. Herger, I am just curious—whose brainchild 

was this in 2005? I know this—it originated in the Senate. It was 


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something that was tagged onto a legislation in the latter hours 

going through. Part of an omnibus pay-for. You do not know who 

in the Senate—— 

Mr. HERGER. Well, I think it is public knowledge who has been 

supporting this. 

Mr. LANDRY. I do not know. That is why I am asking. 

Mr. HERGER. It came through the Finance Committee of the Senate. 

Mr. LANDRY. Because it just seems to me that this automatically 

increases government’s cost. I mean, companies who are operating 

on thin margins and need cash flow, when they are going to bid 

on these projects they are going to have to factor this in. So that 

just increases our costs. I am just trying to figure out as a freshman here how people come up with ridiculous legislation like this. 

Mr. HERGER. Well, giving them the benefit of the doubt I have 

to believe that it was well meaning. I am sure they thought, well, 

we will just withhold 3 percent. That way we will make sure that 

we collect it. But again, I think it is obvious as we look at it and 

analyze it, it was something that was not well thought out. And 

certainly as we are hearing from our small business people. And 

not just the small business, but as was mentioned, just the Department of Defense. It was estimated it was going to cost them an additional $17 billion to implement this. So I think as we analyze it, 

something that might have started off well meaning, certainly we 

can see the repercussions are very, very derogatory and negative 

and something we need to correct sooner than later. 

Mr. LANDRY. But what I do not understand is they must have 

known it would have had some sort of impact because they kicked 

the can down the road to 2010. And then of course they realized 

that it was a problem and they kicked it down again and now it 

is in our lap. I am trying to figure out, you know, I guess what they 

think about when they pass legislation like this. I know it is like 

a feel-good piece of legislation telling the American people that, you 

know, we are going to do something for tax cheats when really 

what we should be doing is letting the IRS go in and enforce those 

provisions. So I was just—I was trying to get a little bit—I know 

you have been here for a long time and so I am trying to get some 

wise advice, I guess, today. 

Mr. HERGER. Mr. Landry, I think the wise advice is coming from 

new members like yourself that have been out in the real world. 

I think the bottom line is as has happened so often, well meaning 

legislation many times has not been thought out and how it really 

affects regular people that are out in America trying to make a living for their family, trying to grow their business and hire new people. 

This is certainly one of those, I would say, pieces of legislation 

that was intended to collect taxes that were not being paid that I 

believe was not thought through very well at the time. It might 

have been—I am sure it was well meaning. I have to believe it was 

well meaning at the time, but we can certainly—what is important 

is that at this time we can see it is not working. It is very harmful 

to small business at a time when we need to be growing jobs and 

expanding our economy. This is the type of legislation that is working exactly in the opposite direction. 


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Mr. LANDRY. Well, I want to thank you because that is why I 

came to Congress, to vote on legislation just like this. So I certainly 

hope that Ways and Means takes it up. 

Thank you. I yield back. 

Chairman MULVANEY. Mr. Herger, thank you again. I appreciate 

you coming in, and thank you for offering the bill this year. 

Mr. HERGER. Thank you. And again, I want to thank this Committee. I want to thank you, Mr. Chairman, who also is a new 

member. I compliment you for being chairman. 

Chairman MULVANEY. And a small businessman, so I really appreciate it. 

Mr. HERGER. A small business one. And this is the type, as well 

as Mr. West and some others, this is the time to correct this. 

Thank you for your emphasis. Working together we will repeal this. 

Chairman MULVANEY. Thank you, Mr. Herger. 

I will ask the Committee to go ahead and begin to seat the second panel if we can. 

And while the second panelists are coming up, a word to all of 

the panelists. There are those little crazy lights in front of you. 

They are green, yellow, and red. It will be green for the first four 

minutes, yellow for the second minute, and then turn red. We usually do let you go a few minutes beyond if you like. Today we would 

like, again, to try and keep as close as we can because of the time 

constraints that we are under. If you start to hear this tapping motion, that means that we are asking you to please wrap things up 

as quickly as you possibly can. 

The second panel has two government witnesses. First, I am 

pleased to welcome Mr. Curtis Loftis, Jr. Mr. Loftis was elected 

treasurer of the great state of South Carolina in November of last 

year. In this role, Mr. Loftis is responsible for the investment, cash 

management, and safekeeping of the state’s general and restricted 

funds, and also the assets of the South Carolina Retirement Systems. He also serves as the vice chairman of our State Budget and 

Control Board, which handles the State Procurement programs, 

state insurance, the Budget office, the State Auditor’s office, State 

Human Resources office, the General Services offices, the Budget 

office, and the State Technology office. Prior to running for office, 

Mr. Loftis owned and operated a very successful small business in 

West Columbia. Welcome Mr. Loftis. 

I would also like to welcome at the same time our second witness, Mr. Brian George. He is the deputy director of the Office of 

Cost, Pricing, and Finance, Defense Procurement and Acquisition 

Policy, where he is the lead for reinvigorating costs and pricing 

skills within the Defense Department and advises the director on 

issues relating to contract costs, pricing, and finance. 

He is accompanied by Mr. David McDermott, the director of 

Standards, Compliance, Defense Finance, and Accounting Service. 

Mr. Dermott is responsible for developing finance and accounting 

goals and standards and analyzing operational results. Mr. George 

is going to provide testimony on behalf of the Defense Department 

and answer questions related to those issues. Mr. McDermott will 

not be testifying but is also available to answer questions as well, 

especially regarding the Defense accounting system. Gentlemen, 

thank you. 


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We will go ahead and recognize Mr. Loftis for his comments. 

STATEMENT OF CURTIS M. LOFTIS, JR. 

Mr. LOFTIS. Thank you, sir. Mr. Chairman, members of the Committee, I am honored to be here today. 

Mr. Chairman and members of the Committee, I am very honored to be here today. I urge the repeal of the federal 3 percent 

withholding provision. Section 511 imposes an arduous and costly 

mandate. It will unfairly penalize state and local governments and 

businesses that run honest, taxpaying companies. The impact and 

unintended consequences of this requirement on both government 

and private enterprise are serious. Expensive implementation costs 

come during a time of a weak financial recovery. Compliance with 

this recovery will prove oppressive, deprive entries, and will definitely cost us jobs. Of course, the taxpayer will have to pay the burden of this plan. 

I am the Treasurer of South Carolina, but I am also a small businessman. I have three dozen employees in Columbia, so I have to 

take these issues seriously. I would like to share with you how I 

see the impact of all of this. First, let us look at the negative impacts on the state and local governments. The provision imposes 

administrative costs and recording requirements for implementation and maintenance of the vendor tax withholding and the actual 

payment of the tax on behalf of the vendors to the IRS. It will be 

an administrative nightmare. There will be major modifications to 

accounting systems and other administrative processes. The manpower and dollar costs of the provisions for the local and state government access across the country will be astronomical. Coupled 

with administrative costs, many believe the vendors will increase 

their prices to government in order to compensate for this penalty 

tax. Again, as a result the taxpayers will pay more. 

The withholding law will negatively affect governments’ budgets 

at a time when every dollar counts. Smaller units of governments 

may not be able to sustain the burden of administering this program. Federal tax enforcement is the function of the IRS and the 

federal government, not of the state and local governments. The 3 

percent withholding penalizes all tax-compliant businesses. It 

forces them to provide the federal government with an interest-free 

loan by requiring advanced payment on taxes which may not even 

be due at the end of the year. The withholding is based on gross 

revenues from contract payments and they may have no relationship to taxable income. Firms with tight profit margins will lose 

funds necessary for vital operations. Cash flow may be damaged to 

the point that some companies withdraw from doing business with 

the government altogether. Business expansion could be halted or 

deferred. Additional cash flow constraints can push some companies out of business altogether. 

I am particularly concerned about what Section 511 does to my 

home state. Small business is essential to the well-being of South 

Carolina. In 2008, there were 364,000 small businesses in South 

Carolina, and they account for 50 percent of the private sector jobs. 

Small firms made up 97 percent of South Carolina employers. 

Small business is the engine that drives South Carolina’s economy. 

The success of the small business sector is critical to our economic 


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recovery. The withholding requirement will reduce the amount of 

capital available for payroll, new business investment, and daily 

expenses. South Carolina’s unemployment rate in April placed us 

at the ninth highest in the country. 

Mr. Chairman, we need jobs, not more regulation. We need capital, not more taxes. There is a saying, ‘‘an error we refuse to correct has many lives.’’ I believe the negative consequences of this 

mandate will snowball, so I strongly urge the members of this 

Committee and the House to take action as quickly as possible to 

repeal Section 511. I would like to commend Representative Herger 

for his work on H.R. 674, and also Mr. Chairman, I would like to 

give a special thank you to my fellow South Carolinian for allowing 

me to come and speak to you on behalf of the state and local governments in South Carolina. 

[The statement of Mr. Loftis follows:] 

Chairman MULVANEY. Thank you, Mr. Loftis. I appreciate that 

very much. 

Mr. George, if you will go ahead and give your testimony, then 

we will ask questions of the panel as a group. 

STATEMENT OF BRIAN GEORGE 

Mr. GEORGE. Chairman Mulvaney, Congresswoman Chu, and 

distinguished members of the Subcommittee on Contracting and 

Work Force. I welcome the opportunity to appear before you today 

to discuss the Department’s Report to Congress. 

Our 2008 report addressed the impacts of compliance with Section 511 of the Tax Increase Prevention and Reconciliation Act of 

2005. My name is Brian George, and I serve as the Deputy Director 

in the Office of Cost, Pricing and Finance for the Defense Department. My organization prepared the 2008 report. 

With me today is Mr. David McDermott, the Director for Standards and Compliance at the Defense Finance and Accounting Service. He is responsible for overseeing the Comptroller’s implementation of Section 511. Our report was submitted in response to the 

House’s Committee and Armed Services’ request that the Department assess the impact of compliance with Section 511. As you are 

well aware, Section 511 requires federal, state, and local governments to withhold and remit to the IRS 3 percent of payments 

made to contractors for goods and services. At the time the report 

was prepared, the IRS had not developed regulations to implement 

the Section 511 withholds. As a result, our report was based on a 

number of assumptions regarding how the IRS would implement 

the withholds. 

We originally estimated for implementation and then management for the first five years, $17 billion to comply with Section 511. 

This included about $4 billion related to the Department losing the 

use of the commercial purchase card and about $13 billion related 

to contractors’ costs. The Department still expects the impact to 

comply with Section 511 to be in the billions of dollars but lower 

than the original estimate. It will be lower since a few of our assumptions in 2008 differed from the final IRS regulations published this month. Let me discuss just two of those assumptions. 

We correctly assumed the IRS would not allow companies to offset the amounts withheld under Section 511 against their estiVerDate Mar 15 2010 23:16 Jul 21, 2011 Jkt 067299 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\A299.XXX A299

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mated quarterly income or payroll tax payments. The report expressed our concern that contractors properly paying their tax obligations will experience cash shortages equal to the amounts withheld until the amounts are recovered through the normal federal 

income tax process. However, we incorrectly assumed that the IRS 

would not exclude third-party payments, such as the commercial 

purchase card, from the 3 percent withhold. Our report stated that 

if third-party payments were not excluded, DOD would lose its 

ability to use the commercial purchase card. This would occur because the Department would not be able to execute withholds 

against those payments. Almost $8 billion of our estimate related 

to that impact. However, in its final rule, the IRS indicated that 

it may require withholding of such transactions in the future. 

Although the costs for DOD and our contractors to implement 

Section 511 will be less than we estimated three years ago, we still 

expect the impact to be significant. The Department is concerned 

that Section 511 will restrict the available cash of tax-compliant 

companies, especially small businesses and we are also concerned 

the Department may lose its use of the commercial purchase card 

in the future. 

This concludes my verbal statement. Mr. McDermott, I will be 

happy to address your questions and request that my written statement be entered into the record. 

[The statement of Mr. George follows:] 

Chairman MULVANEY. Thank you, gentlemen. And for all of the 

witnesses, your witness statements have already been entered into 

the record. 

Very quick question. You hit on something, Mr. George, that 

caught my attention, which is the $17 billion was roughly broken 

into two pots—$4 billion for this purchase card but $13 billion for 

increased contractor costs. Tell me a little bit more about that. How 

did you all arrive at the number? What is driving that number? 

Mr. GEORGE. I will be glad to tell you about that. 

Of the $13 billion for the contractor, about $4 billion related to 

the purchase card, $9 billion related to implementation costs and 

re-incurring costs to implement this rule. 

Chairman MULVANEY. So to implement this particular regulation 

would cost just the Department of Defense—not the whole federal 

government, just the Department of Defense—$9 billion? 

Mr. GEORGE. Well, the $9 billion—— 

Chairman MULVANEY. Million or billion, sir? 

Mr. GEORGE. Billion. 

Chairman MULVANEY. Okay. 

Mr. GEORGE. Of the $9 billion, most of that is contractors’ cost. 

Chairman MULVANEY. For them to implement it? 

Mr. GEORGE. That is correct. 

Chairman MULVANEY. Which is then passed on to us through 

higher costs. 

Mr. GEORGE. It could be passed on to us. That is correct. 

Chairman MULVANEY. Exactly. Thank you, Mr. George. 

Mr. Loftis, do we—very briefly, do we withhold in the state of 

South Carolina in a system similar to that? Do we withhold for 

taxes? 


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Mr. LOFTIS. No, sir. We have a limited program for out-of-state 

contractors who do work with the state but it is a state tax. Nothing for the federal government. 

Chairman MULVANEY. So you would have to completely overhaul 

your entire accounting system at the state, local, and county level 

in order to implement this regulation. 

Mr. LOFTIS. That is right. There are multiple agencies now, like 

the Department of Revenue, the Treasurer’s Office, Comptroller 

General, and others, the Budget Office, who are working on this all 

without any certainty of where the program is going. So it equates 

to a lot of wasted man-hours so far. 

Chairman MULVANEY. I recognize Ms. Chu for as much time as 

she needs. 

Ms. CHU. Mr. George, we have talked about the implementation 

costs for the DOD. Are you aware of any other agencies that have 

conducted similar studies that analyze their costs in complying 

with the 3 percent law? 

Mr. GEORGE. No, ma’am. I am not familiar with any other agencies. 

Ms. CHU. DOD, of course, is so large. Would you anticipate that 

it might cost even more for smaller agencies to implement such a 

withholding? 

Mr. MCDERMOTT. I would be reluctant to answer for any other 

agencies, Congresswoman Chu. 

Ms. CHU. Well, then, Mr. McDermott, let me ask. The original intent of the 3 percent withholding was to stop tax cheats. It is a 

laudable goal because there are many tax-compliant businesses 

that are competing with these tax-avoiding businesses. However, 

the 3 percent withholding provision will make honest taxpayers 

face these enormous burdens under this law. As the Director on 

Standards and Compliance, what other less burdensome methods 

are available to the federal government to ensure that government 

contractors are also good taxpayers? 

Mr. MCDERMOTT. Congresswoman Chu, I can speak to what we 

do today to ensure that we are working with companies that are 

not delinquent on their taxes. In the beginning of the contracting 

process, the contracting officers do check to see with the Contractor 

Registration System to see if a contractor has been disbarred or for 

some reason has some delinquency or other reason that they would 

not do work with the government. For the agency that I work with, 

we participate in a program called the Treasury Offset Program, 

where we trade information with the Department of the Treasury, 

approximately 13,000 payments a day that we share information 

with the Treasury on that the Treasury looks to see if there are 

any delinquencies either for taxes or other government debts. And 

if there is such a debt, we offset the amount up to the amount of 

the payment that we are looking at at that particular time. During 

fiscal year 2010, we were able to liquidate 3,500—approximately 

3,500 debts. That is our main way of ensuring that we assist the 

rest of our government partners in liquidating debts to include tax 

debts. 

Ms. CHU. How do you assess the success of this? 

Mr. MCDERMOTT. We believe that it is a successful program by 

virtue of the fact that we did find approximately 3,500 debts workVerDate Mar 15 2010 23:16 Jul 21, 2011 Jkt 067299 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\A299.XXX A299

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ing with the Treasury, and those were funds that were recouped 

to the government that did not go to the contractor where we 

would have to go after them after we had made that payment. 

Ms. CHU. Mr. George or Mr. McDermott, small businesses provide the federal government with goods and services in a wide 

range of services. Examples include construction contracts, retail, 

and information technology services. From the DOD’s perspective, 

are there any industries that would be disproportionately affected 

by the 3 percent withholding requirement? 

Mr. GEORGE. Ma’am, not from my perspective. I think small businesses would be hurt perhaps harder. And that is speculation on 

my part. And let me just go back to the other question you asked 

Mr. McDermott. One thing that has happened on the contracting 

side since this law is passed is that contractors have to certify that 

they are not tax delinquent to get a government contract. So that 

is a significant step they have to go through now to get a contract. 

It did not happen before. 

Ms. CHU. Yes, Mr. McDermott. 

Mr. MCDERMOTT. Congresswoman Chu, our applicability of this 

would be across every organization that we do business with so I 

cannot say that any one particular business would be disproportionately affected just by the withholding. Obviously, other things 

that you have discussed about small businesses and the impact it 

may have on that. 

Ms. CHU. Mr. George, the SBA estimates that nearly 75 percent 

of all small firms will fail within the first five years, while existing 

firms may be able to absorb a 3 percent withholding, newly formed 

firms are often the most cash strapped. At a time when we should 

be promoting economic development, has your office done any assessment on the impact that the 3 percent requirement would have 

on start-up companies? 

Mr. GEORGE. We have not done that, but one thing we have tried 

to do for small businesses, is we just implemented a new rule 

where we can accelerate payments to small businesses. So we are 

aware it is important to increase their cash flow, so we are trying 

to do that as a Department. 

Ms. CHU. Thank you. I yield back. 

Chairman MULVANEY. Thank you. I recognize the gentleman 

from Florida, Mr. West, for five minutes. 

Mr. WEST. Thank you, Mr. Chairman. My question is for you, 

Mr. George and Mr. McDermott. 

A couple of weeks ago I had a really good conversation with a 

dear friend of mine, Colonel Pete Newell, who is the head of the 

Rapid Equipping Force for the United States Army. Are you familiar with the Rapid Equipping Force mission? 

Mr. MCDERMOTT. I am not. 

Mr. GEORGE. Not personally. 

Mr. WEST. Okay. The Rapid Equipping Force for the United 

States Army, what they do is they go out into the combat theaters 

of operation and they give recommendations from the soldiers that 

are on the ground and then they come back here to look for small 

businesses that can provide these requirements to these emerging 

technologies that they do not have to go through an entire longdrawn-out procurement process. You know, my concern when I look 


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at this, and I would like to get your estimate, do you think that 

this 3 percent withholding provision would incentivize a lot of 

small businesses to go into contracts that can enable us to provide, 

you know, rapid technologies to our soldiers that are on the combat 

theaters of operation right now? 

Mr. GEORGE. Incentivize or decentivize? 

Mr. WEST. Well, do you think that as it is right now this provision, will it incentivize people to go into, you know, contracts with 

the United States Army to provide these emerging technologies for 

our soldiers in the field? 

Mr. GEORGE. I would speculate it would not incentivize them at 

all. 

Mr. WEST. Thank you very much. I yield back. 

Chairman MULVANEY. Thank you. At this time I would like to 

recognize the gentleman from Oregon, Mr. Schrader, for five minutes. 

Mr. SCHRADER. Thank you, Mr. Chairman. 

Since you are resident government experts, I will ask a couple 

questions. And if you are unable to answer them I would understand. 

The bill as originally conceived talked about some exceptions. Do 

you all know the exceptions to the 3 percent withholding? 

Mr. GEORGE. Off the top of my head, no. 

Mr. SCHRADER. All right. Given the fact, and you alluded to it a 

moment ago in your testimony, Mr. George, that there have been 

some improvements and changes in how we are addressing some 

of the delinquencies that have occurred. Could you elaborate a little 

bit on some of the others that are out there that have occurred 

since this bill was put in play and how that has hopefully, possibly 

affected your ability to collect money you would otherwise not have 

been able to collect from contractors? 

Mr. GEORGE. Well, I would say there are two. One is on the contracting side and one is on the Comptroller side as we mentioned. 

One is, again, very significant. They have to register if they have 

$3,000 or more in delinquent taxes before they get a contract. The 

contracting officer has to look at that, and if it is actually affirmative, they have to investigate that and may even refer that to the 

Debarment Official if there is an affirmative response. On the 

Comptroller’s side, Mr. McDermott mentioned about the offset program as well. So those two things I think have been, at the prime 

contract level, very successful. 

Mr. SCHRADER. Are you able to quantify how much improvement 

you have gotten and DOD, you know, how your collections have improved quantitatively as a result of those types of improvements? 

Mr. MCDERMOTT. Congressman Schrader, for fiscal year 2010, 

because of the Treasury Offset Program, we were able to collect on 

approximately 3,500 instances of debt. I do not have the dollar 

amount to be able to quantify that. But prior to the Treasury Offset program we were not sharing that type of information so that 

would have been information we would not have had to offset those 

payments. 

Mr. SCHRADER. So that is good news. Without having to burden 

small businesses you are making progress with some of the newer 

regulations. Is it not also true that the acquisition forms and procVerDate Mar 15 2010 23:16 Jul 21, 2011 Jkt 067299 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A299.XXX A299

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esses would have to be changed at some cost to the federal government as a result of this law if it gets implemented? 

Mr. GEORGE. On the acquisition side we would have to make 

some changes to our systems and also on the Comptroller side. And 

we would have to implement regulations to make sure we collect 

the 3 percent withhold. That is correct. 

Mr. SCHRADER. So to reiterate a point that I think is being made 

here, we are only seeing the tip of the iceberg in terms of increased 

cost to government contractors and small businesses as a result of 

this 3 percent withholding? 

Mr. GEORGE. There is definitely an increased cost. That is correct. 

Mr. SCHRADER. I guess I will yield back, Mr. Chair. Thank you. 

Chairman MULVANEY. Thank you, Mr. Schrader. 

I recognize the gentle lady from North Carolina, Ms. Ellmers, for 

up to five minutes. 

Ms. ELLMERS. Thank you so much, Mr. Chairman. 

My questions are going to be directed to each one of you. You 

know, the cost of doing business in this country is extravagant and 

we are losing jobs and we are not creating jobs because of it. Mr. 

Loftis, in your opinion, does this 3 percent withholding increase 

jobs or decrease jobs? 

Mr. LOFTIS. Decreases jobs most decidedly. 

Ms. ELLMERS. Mr. McDermott? 

Mr. MCDERMOTT. That would be out of my area of expertise, 

Congresswoman Ellmers, to answer. 

Ms. ELLMERS. Well, from a common sense standpoint, if the cost 

of doing business is increased for any small business company, contractor, does not that really equal the loss of jobs? That is one less 

job for every regulation. Every tax that you have to adhere to, that 

could possibly be a job that you are not creating. Would you not 

agree? 

Mr. MCDERMOTT. Congresswoman Ellmers, I cannot disagree 

with you but I would not be able to base that on our estimates or 

what we are doing to implement this law. But I cannot disagree 

with you. 

Ms. ELLMERS. So let me ask you this then. From a small business perspective, contractor perspective, do you believe, do you 

agree that the cost will have to increase for consumers? That the 

cost of doing business will go up because of this 3 percent increase? 

Mr. MCDERMOTT. Again, Congresswoman Ellmers, I cannot say 

for sure. I am sure there are a number of different ways that a 

business person would look at this to try and compensate for it to 

ensure that they have appropriate cash flow and to compensate for 

their profit margins. 

Ms. ELLMERS. Do you believe the revenue that has been found 

or the tax advantage that you had mentioned that there were some 

tax revenues that were found because of this, do you think that 

that fully offsets the cost to our consumers? 

Mr. MCDERMOTT. I do not have the exact dollar amount of what 

we collected but I am quite positive that it would be less than what 

we are estimating it would cost to implement this. 


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Ms. ELLMERS. That it would be actually less? The money that is 

actually generated for the government in tax revenue is actually 

less than the cost to the business owner? 

Mr. MCDERMOTT. From the Treasury Offset program, yes. 

Ms. ELLMERS. Okay. Mr. George, could you—— 

Mr. GEORGE. Let me answer that from a personal perspective. I 

think when you mention it will increase costs, I think it will increase costs. At one time I was on the board of a small, not-forprofit small business. It was a school, on the Board of Directors, 

and cash flow was incredibly important. And this will affect their 

cash flow. And if you do not have cash, you cannot pay employees. 

And that actually happened to us a few times. So I understand the 

impact to small businesses. 

Ms. ELLMERS. Yeah, you know, I mean, we are seeing this over 

and over again. I had the opportunity back home last week when 

we were in our district sitting down with small business owners, 

some of them contractors, and the cost of doing business is so high 

that they cannot create jobs. There are so many issues. Regulation 

taxation is what is harming all of our businesses and that is why 

we are not creating jobs in this country. You know, the private sector is where these jobs are created and until we deal with these 

issues, we are going to continue to see this. We can turn this 

around. It is just going to take a matter of all of us putting our 

heads together. 

Thank you. With that, Mr. Chairman, I yield back. 

Chairman MULVANEY. Thank you, Ms. Ellmers. 

I have one or two brief follow-up questions for Mr. Loftis. Mr. 

Loftis, you mentioned in your testimony that—I think you said you 

are already starting to try to implement this. Is that correct? 

Mr. LOFTIS. Well, we have to study it. You know, the deadlines 

keep being pushed back, so the CG’s Office has spent a significant 

amount of time. The Department of Revenue, I mean, all of these 

offices, we study and then it gets put off. And then we study it and 

it gets put off. We have to devote valuable man-time to it. The computer resources devoted to it and the changes needed are going to 

be particularly expensive. We have just gone to a new statewide accounting program, which of course will have to be altered. 

Chairman MULVANEY. And is that replicated at the counties and 

the town levels as well? 

Mr. LOFTIS. Counties and towns will have a very difficult time. 

You know, I think the threshold that you could drop below that you 

do not have to mind this regulation is $100 million. But for counties that have hospitals or school districts, that is not very hard to 

get through at all. And they are just not equipped. Treasurers’ offices in some of the counties may be two people. 

Chairman MULVANEY. You know, we talk oftentimes up here 

about the importance of making permanent changes as opposed to 

continually making temporary changes. In your mind is there a difference between a one or two year extension and just a complete 

removal of this requirement? 

Mr. LOFTIS. The complete removal would be great. The uncertainty breeds just that, uncertainty, and that costs us money. 

Chairman MULVANEY. And how many contracts approximately is 

the state of South Carolina going to be impacted in? 


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Mr. LOFTIS. Well, it is funny you ask that because I tried to find 

that out. And we do not know because the contractor process is so 

old it has never been brought on computers like it should be. So 

this is one of the problems. So when we started investigating 

whether or not we will have to have arbitration contracts that were 

multi-year extend into this period, we just do not know. 

Chairman MULVANEY. Is there any reason to think it is going to 

be better in any of the other states? 

Mr. LOFTIS. I cannot imagine, no. We are relatively small. I 

would think it would be awful in a state like California or Texas 

or New York. 

Chairman MULVANEY. I cannot imagine the headaches they 

would have. 

Gentlemen, thank you very much. I really appreciate your time. 

Does anyone have any follow-up questions? Thank you again. 

At this time I would like to seat our third panel. The final panel 

is made up of three small business witnesses and a government 

contracts expert. 

The first witness is Mr. Mike Murphy, president of Murphy Turner Company, Inc., a third-generation, family-owned general contractor specializing in water and waste water treatment plants. He 

is also from Rock Hill, South Carolina. Mr. Murphy is testifying on 

behalf of the Associated General Contractors of America. I am especially pleased to welcome Mr. Murphy as he is one of my constituents. 

We also have with us Mr. Ian Frost, a principal at EEE Consulting in Mechanicsville, Virginia. He is testifying on behalf of the 

American Council of Engineering Companies. Mr. Frost, welcome 

as well. 

And we have Mr. James Gaffney, vice president of Goshen Mechanical in Malvern, Pennsylvania, testifying on behalf of Quality 

Construction Alliance. 

And we also have an additional witness who will be introduced 

by the ranking member, Ms. Chu. 

Ms. CHU. Thank you, Mr. Chair. 

It is my pleasure to introduce Kara Sacilotto, who is a partner 

with the law firm Wiley Rein Law Firm and is an expert in federal 

procurement law and policy. She has extensive experience in litigation matters relating to government contracts, including bid protests, claims litigation, prime subcontractor disputes, and trade secret misappropriation litigation. She regularly counsels government 

contractors regarding compliance matters and has conducted numerous internal investigations of alleged misconduct by government contractors. Ms. Sacilotto is also an adjunct faculty member 

at George Mason Law School. Thank you for being here today, Ms. 

Sacilotto. 

Chairman MULVANEY. Thank you, Ms. Chu. And welcome, Ms. 

Sacilotto as well. 

We will begin with Mr. Murphy. Mr. Murphy. 

STATEMENT OF MIKE MURPHY 

Mr. MURPHY. Thank you. Thank you, Chairman Mulvaney and 

Ranking Member Chu for the opportunity to testify on the 3 percent withholding law. I am testifying on behalf of the Associated 


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General Contractors of America, a national Trade Association representing more than 32,000 companies, including 7,000 of America’s leading general contractors and 11,000 specialty contractors. 

My name is Mike Murphy. I am president of Turner Murphy 

Company. My dad, Turner Murphy, started our company in 1950. 

We are a third-generation construction company based in Rock 

Hill, South Carolina. Today we work primarily on wastewater and 

water treatment plants construction ranging in size from $100,000 

to $25 million. We employ seven full-time employees in the office 

and 20 to 40 in the field depending on how much work we have. 

However, I believe Congress is making it tougher and tougher for 

my company to stay in business by not repealing a requirement 

that will make federal, state, and local governments withhold 3 

percent from each and every payment to contractors for goods and 

services. 

This withholding applies to the total contract, not to the taxable 

net revenue generated from a project. This provision has nothing 

to do with my company’s tax liability. It is just an accounting gimmick that whitewashes over the real costs of government while 

leaving small companies like mine holding the bag. 

This 3 percent holding is more than the profit margin on most 

public construction contracts for companies like mine. The average 

take-home after taxes for construction is 3.2 percent, and for smaller construction companies, 25 million and under, the margin is 

closer to 1.6 percent. So the 3 percent withholding is almost 200 

percent of the total profit for small companies. 

Local, state, and federal governments already hold five to 10 percent on our payments until project completion. Retainage is different than this withholding requirement in that it is tied directly 

to the project and is released when the project is completed. The 

3 percent withholding is not tied to the project nor based on any 

project performance criteria. It is not released when the project is 

completed. It is held for as much as a year or more. It is just an 

interest-free loan to the federal government. 

This withholding also affects critical parts of my business such 

as cash flow and bonding capacity. When the public owner I am 

working for withholds 3 percent from each and every payment it 

causes my company to finance more of the work on the project 

without being paid for it. This ripples down to my suppliers, subcontractors, and service providers. Some suppliers ask for payment 

upfront, which means I am paying for things before even being reimbursed by the government entity. The additional 3 percent withholding will make this process even worse, which could possibly 

hamper the ability of some general contractors to pay their subcontractors in a timely manner. 

This reduced cash flow would also restrict bonding capacity 

which is a key to my company being able to bid on projects. Federal 

law requires that construction contractors carry several types of 

bonds. Surety companies who provide the bonds study my books in 

detail before offering coverage. Based on past performance on contracts, the suitability of my company to perform the work for which 

I bid, my assets, and my cash flow, surety gives Turner Murphy 

Company a bond rating which governs the price of the bonds and 


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how much bonded coverage I can receive. My ability to get bonding 

directly impacts how much work my company can take on. 

Implementation of this law could not come at a worse time for 

my company and my industry. The construction industry went into 

a recession a year and a half before the overall economy and still 

has not emerged from it. The industry has lost nearly a third of 

its workers and nearly a third of the construction put in place since 

2006. The tough economic conditions have made competition on 

public jobs fierce and profit margins tight. We are seeing more and 

more bidders on a dwindling number of projects. This causes many 

companies to shave more and more out of profit margins in hope 

of actually getting the job. 

What is truly frustrating for us is that there are already policies 

in place that prevent the kind of tax behavior this law is designed 

to stop. Instead of punishing all contractors, the federal government should enforce the laws already on the books. Existing laws 

require all corporations to make quarterly estimated tax payments 

to cover income tax liabilities. These laws should be vigorously enforced, and on public projects all of our jobs are bonded. Having 

bonds on projects ensures the taxpayers that the jobs will be completed at no additional cost to the public. 

This new 3 percent withholding law is just another layer of red 

tape that creates serious cash flow problems for government contractors in perhaps the worst industry conditions in modern times. 

It does not help solve a problem by using solutions that are already 

on the books. It is just a bad public policy. Three percent withholding on government contracts will seriously impact my business 

and the businesses of the construction industry at large. The vast 

majority of the members of the contracting community are responsible taxpayers. Do not punish the whole industry because of a few 

bad apples. 

Again, thank you for the opportunity to testify on behalf of ADC, 

and I appreciate the fact that three members of the Subcommittee 

and six members of the Full Committee have co-sponsored this legislation. I look forward to any questions that you may have that 

will help get the rest of you to co-sponsor H.R. 674. 

[The statement of Mr. Murphy follows:] 

Chairman MULVANEY. Thank you, Mr. Murphy. I appreciate 

that. 

Mr. Frost, you are recognized for up to five minutes. 

STATEMENT OF IAN FROST 

Mr. FROST. Chairman Mulvaney, Ranking Member Chu, and 

members of the Committee. I appreciate the opportunity to testify 

today on the three percent withholding mandate, and particularly 

its impact on small firms that contract with federal, state, and 

local entities of government. 

My name is Ian Frost and I am the president of EEE Consulting. 

We are a small engineering firm based in Richmond, Virginia. I am 

here to ask for your assistance in repealing the three percent withholding rule. 

As you know, in 2006, Congress included a provision in the Conference Report for the Tax Increase Prevention and Reconciliation 

Act that requires federal, state, and local governments that spend 


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more than $100 million a year on goods and services to withhold 

three percent from payments to engineering firms and other contractors. I am also a member of the American Council of Engineering Companies, ACEC, the voice of America’s engineering industry. 

ACEC firms number more than 5,000, over 70 percent of which are 

small firms. Most have government clients, and like EEE Consulting, would be negatively affected by the three percent withholding mandate. 

EEE Consulting has been in business since 1998 and has grown to a 36-person firm with revenues of about $4.3 million last year. 

About 95 percent of our work is for local, state, and federal agencies. During one of the most difficult economic periods that we have 

lived through, we have experienced steady growth. Since the recession started, we have actually added 13 new employees, five of 

whom were unemployed. We also signed an agreement to build a 

new office just as the recession hit. Despite a lot of trepidation over 

the economic forecast, we stayed the course on the new building 

and moved in during the spring of 2010. Our success could not 

have occurred without an unencumbered cash flow. We have relied 

upon the personal finances of our owners and the company’s cash 

reserves to buy new equipment, to pay the salaries of new employees until we get paid by our clients, and to pay for expansion of 

the company, including the new construction. 

To a small business, cash flow is everything. I am immensely 

proud of our past record, yet concerned about the future because 

the pending three percent withholding rule would negatively affect 

our cash flow and our potential to grow and add new jobs. If enacted right now, the rule would mean the withholding of approximately $130,000 of our projected 2011 revenue and it might require 

our company to secure a loan to help us cover operating expenses 

at a time when cash in the bank is limited. The withholding could 

limit our ability to make payroll each month, our ability to expand 

our business, and hire new employees. A $130,000 withholding 

each year would deplete our cash reserves by about 30 percent. 

Our situation is not unique. Our trade association, ACEC, has 

raised serious concerns over how this mandate will impact engineering firms, including thousands of small firms like mine that 

work for government. Many engineering companies realize a profit 

margin of just about three to five percent on a contract, and withholding three percent up front for tax purposes will force them to 

divert funds needed to complete the contract, thereby creating cash 

flow problems. Three percent withholding will also burden small 

firms with additional administrative and recordkeeping costs. 

Firms like mine will have to modify their accounting systems in 

order to keep track of the withholding and ensure that it matches 

with their tax records and tax refunds. 

I frequently hear in the news that small businesses are the economic engine for the country and are likely to be the main source 

of job creation that is needed to reduce our unemployment rate. 

Why then would the federal government want to handcuff that economic engine by withholding a percentage of our contracts, hurting 

our cash flow, and limiting our ability to add new jobs? 

I know that the withholding rule is intended to help with tax collections, but it seems unreasonable to punish everyone involved in 


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government contracting due to the actions of just a few. The only 

solution to this problem is to repeal the three percent withholding 

mandate and replace it with measures that target firms and individuals that are not in compliance with the tax laws. 

I have attached to my testimony a list compiled by the Government Withholding Relief Coalition of tax compliance measures that 

have been enacted since the three percent withholding provision 

was passed in 2006. For example, in 2008, the Federal Acquisition 

Regulation was amended to require potential federal contractors to 

certify that they are in compliance with their federal tax obligations. This provision makes noncompliance with the tax code 

grounds for suspension and debarment from government contracting. Measures such as this focus on the problem instead of impacting firms that pay their taxes. 

As an owner of a small business, I ask you to help give us relief 

from the unfair withholding rule. Please find alternatives that ensure that the government receives its share of our revenue without 

damaging our ability to operate, add new jobs, and meet our payroll. 

Thank you for the opportunity to participate in today’s hearing, 

and I would be happy to respond to any questions. 

[The statement of Mr. Frost follows:] 

Chairman MULVANEY Thank you, Mr. Frost. And as I mentioned, 

we will take questions for the whole panel after the testimony is 

finished. 

Mr. Gaffney, you are recognized for up to five minutes. 

STATEMENT OF JAMES M. GAFFNEY 

Mr. GAFFNEY. Good morning, Chairman Mulvaney and members 

of the House Small Business Committee, Subcommittee on Contracting. On Contracting and Work Force. Thank you, Chairman 

Mulvaney, for holding this important hearing today and for inviting me and my association to participate. 

My name is Jim Gaffney, and I am the principal owner of a small 

business mechanical construction firm, Goshen Mechanical Contractors, located in Malvern, Pennsylvania. My firm operates in the 

public sector construction markets throughout the greater Philadelphia area, in the Delaware Valley, and throughout Southeastern 

Pennsylvania. Our firm performs many public sector construction 

projects in which I am prime and subcontractor, such as public 

school new construction and retrofits and other municipal facilities, 

both as a prime and as the sub, with a variety of public sector entities that will be covered by the 3 percent withholding tax unfunded 

mandate if it is not repealed before it takes effect January 1, 2013. 

I am here today representing the Mechanical Contractors Association of America. MCAA is a nationwide specialty construction 

employer trade association based in Rockville, Maryland. MCAA’s 

member companies perform all types of mechanical, plumbing, 

heating and ventilation, new construction and maintenance, and 

service work for public project owners nationwide. The vast majority of MCAA members’ companies are small businesses and many 

of them perform projects of the type that will be covered by the 3 

percent withholding unfunded mandate. 


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I am also president of the Mechanical Contractors Association of 

Eastern Pennsylvania, which is based on the Philadelphia area and 

which counts a majority of small business contractors among its 

100 members. Many of those firms, too, perform projects for government entities that will be covered by the 3 percent withholding 

mandate. I am also privileged to represent four other of our sister 

associations in an ongoing legislative quality construction alliance. 

These groups are the Sheet Metal and Air Conditioning Contractors National Association, the International Council of Employees 

of Bricklayers and Allied Craft Workers, the Finishing Contractors 

Association, and the Association of Union Constructors. According 

to the Bureau of Labor statistic figures, specialty construction employers present the vast majority of industry employment and over 

64 percent of the employment overall in the industry. The majority 

of the QCA association member companies, too, are small businesses and they, too, perform a great deal of public work projects 

with the governmental entities that will be covered by the 3 percent withholding mandate if it should go forward in 2013. 

I should add that many of the QCA groups also actively participate in a wider government withholding relief coalition, which also 

adamantly espouses rapid repeal of the 3 percent withholding provision in Section 511 of the Tax Reconciliation Act of 2005 and the 

QCA fully supports that coalition’s written remarks filed on the 

record for this hearing. 

My business is the American dream. I started my business 25 

years ago in the basement of my mother and father’s home. We 

worked in the field by day and we bid at night and on the weekends. The only real downtime that I had was on Sundays for mass 

and breakfast with my wife and four children. Today we have over 

20 employees and have work on hand of over $8 million. 

The tax, quite honestly, will put me out of business. Last week 

I bid a project in a school district in Lower Merion outside of Philadelphia where I took the job for four percent just to keep the cash 

flow rolling. I lost the job by 3 percent. With retainage being held 

on these projects at 10 percent plus 3 percent, small business will 

be replaced by large brokers that will end up causing the end-user 

more money. Not only will the overall costs go up, but trust me, 

the quality of work will go down. As a prime contractor, I will not 

be able to hold the 3 percent on my subs. As a subcontractor, the 

prime will incorporate some kind of language to exclude the 3 percent from my invoices. 

I have been in business for over 25 years. I pay my taxes every 

year and on time. It is very easy to determine what my taxes are 

by the billing systems that are used on our projects. For each 

project I must submit a detailed breakdown for the project before 

it starts—labor, material, equipment, everything. Soup to nuts. 

Once it is approved, I bill percentages each month for that work 

that was performed. Each month a CM, project manager, or owner’s representative requires a walk-through to visually confirm all 

the work that I have on my invoice has been completed. 

Once my financial statements are updated—and they are done 

every three to six months because the bonding company in this 

economy is on our backs every day—these projects are listed showing the percentages that are completed and our taxes are based on 


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that information. And with the restrictions and the quality background checks that are done in the state of Pennsylvania on a lot 

of the local state’s and school district work, they actually require 

me to submit my financial statement before the project is bid. They 

make me have my accountant notarize that financial statement 

and sign a letter of non-collusion. 

I hear from many economists that in these challenging times 

most people do not get it on how bad the economy is until the bomb 

goes off. I see a lit fuse with this tax. Between the extra costs needed for my office staff to track the tax withholdings and the extra 

work needed from my accountant, I am looking at at least a 24 percent increase in my costs for recordings. 

Thank you for your time. 

[The statement of Mr. Gaffney follows:] 

Chairman MULVANEY. Thank you, Mr. Gaffney. 

Ms. Sacilotto, thank you for waiting. You are recognized for up 

to five minutes. 

STATEMENT OF KARA M. SACILOTTO 

Ms. SACILOTTO. Thank you, Chairman Mulvaney, Ranking Member Chu, and members of the Subcommittee for the invitation to 

participate in today’s hearing. 

You have heard firsthand from others regarding the economic impact of the 3 percent withholding on businesses and the enormous 

administrative costs the law will impose on federal, state, and local 

governments. I share those concerns but my testimony today focuses on a different aspect of the problem, the disruptive and costly 

impact of the withholding requirement on the federal procurement 

system, impacts that will likely be experienced by state and local 

governments as well. My testimony today is mine alone and does 

not represent the views of my firm or any of its clients. 

Today I address three impacts and why I believe government has 

the tools available already to target delinquent taxpaying contractors, making implementation of an across-the-board withholding 

that bears no rational relationship to past or future tax liability 

unnecessary. First, the 3 percent withholding undercuts federal 

policies and programs intended to assist small businesses in contracting with the federal government. These policies and programs 

which I describe in my written testimony are designed to ease the 

cash flow burdens on small businesses, remove barriers to entry, 

and otherwise promote small business participation in federal contracting. The 3 percent withholding requirement, however, directly 

undermines these policies by destabilizing cash flows. It will disproportionately harm small businesses and likely deter the innovative small businesses government is trying to attract from entering 

the federal marketplace at all. 

Second, the 3 percent withholding will discourage commercial 

item contractors from selling their products to government. Congress has enacted laws to encourage vendors of commercial items 

to sell their products to government so that government can take 

advantage of innovative, commercially available products, as well 

as commercial pricing. Over the past decade, however, as the pendulum of regulation has swung back in favor of oversight, commercial item contractors have found themselves subject to more and 


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more of the regulations that apply to their noncommercial counterparts but that have no equivalent in the commercial marketplace. 

The 3 percent withholding and the costs of complying with and administering it are yet another added cost of doing business with the 

government. Given a choice of customers, it is entirely reasonable 

to believe that vendors of commercial items will decline to incur 

this additional cost. Government will then face reduced competition 

for acquisitions of commercial items, diminished access to innovative commercial products, and more than likely increased costs because the costs of dealing with the government no longer reflect the 

costs of the commercial marketplace. 

Third, there will likely be increased disputes between contractors 

and the government. Determining whether a contract has been materially modified such that the withholding would apply to contracts entered into prior to December 31, 2012, or if as the IRS proposes the government can apply the withholding to payments 

under any contract after January 2014, regardless whether the underlying contract includes provisions that permit such a withholding, are just two areas where disputes will arise. Acquisition 

regulations provide that if government wishes to add a new requirement or clause to an existing contract or make some other 

change that increases the contractors’ costs, the contractor is entitled to compensation for the cost of the change. Thus, in addition 

to disputes that will likely arise when parties attempt to true up 

the withholdings, disputes will arise whether the government is 

even entitled to include the withholding requirement in the first instance and the cost for doing so. 

There are likely many more negative impacts on the procurement 

system that will surface if this provision is allowed to take effect. 

If there is good news to this story it would be that there are existing enforcement tools that make imposing this costly and burdensome requirement unnecessary. 

You have heard today about the IRS Federal Levy program that 

targets tax debt. This current law now permits the IRS to levy or 

offset up to 100 percent of any specified payment due to a vendor 

of goods or services sold or leased to the federal government. You 

have also heard that current regulations require contracting officers to determine whether a contractor is responsible prior to the 

award of any federal contract. To assist with this responsibility determination, acquisition regulations were amended in 2008 to require contractors submitting proposals to certify whether they have 

tax debt over $3,000. Contractors also are now required to report 

in a database largely available to the public but fully available to 

contracting officers civil administrative or criminal findings of liability or penalties over $5,000. Acquisition regulations were further amended to permit the government to suspend or debar a contractor from contracting with the government entirely for being delinquent in federal taxes. In 2010, the White House instructed the 

IRS and OMB to review the certifications and report whether delinquent contractors were receiving contract awards. 

In closing, I do not wish to diminish the seriousness of a failure 

to pay taxes but note that the system has mechanisms in place 

that can target delinquent taxpayers without harming taxpaying 

contractors. Given these existing mechanisms, the perceived beneVerDate Mar 15 2010 23:16 Jul 21, 2011 Jkt 067299 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\A299.XXX A299

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fits of the 3 percent withholding are vastly outweighed by the burdens and costs the withholding will oppose. 

Thank you again for this opportunity to share my views, and I 

am happy to address any questions you may have. 

[The statement of Ms. Sacilotto follows:] 

Chairman MULVANEY. Thank you, Ms. Sacilotto. 

I have a few questions for the panel. First to Mr. Murphy. Mr. 

Murphy, one of the things we have heard regularly today is that 

one of the fears here is that contractors will simply add this additional 3 percent to their bids and as a result prices will go up for 

everybody, including the taxpayer. But I understand from your testimony—I think you mentioned it briefly—it is actually worse than 

that. In your industry you cannot do that. Is that right? 

Mr. MURPHY. That is correct. 

Chairman MULVANEY. Tell me why that is. 

Mr. MURPHY. Our margins are so tight now there is always 

somebody that is willing to take the job cheaper, as Mr. Gaffney 

said, for one percent. And normally that added cost you would pass 

on but in this industry and the market we are in now you just cannot do it. It is just something else we are going to have to absorb. 

Another brick we are going to have to put in our load. 

Chairman MULVANEY. You and Mr. Gaffney both mentioned the 

concept of retainage, which I am familiar with but I am not sure 

everybody else here is. When you—tell us a little bit about how 

that works, how retainage works generally. 

Mr. MURPHY. Okay. We have a contract with an entity, let us say Rock Hill. Say $5 million. The first pay request we send in is, say, 

for $100,000. Well, they pay us $90,000 of that $100,000. They hold 

the other 10 percent until the project is complete and you have 

passed certain milestones. So over the course of that project it will 

go—whatever the progress payments are, by the end of the project 

they have got a half million dollars of your money. 

Chairman MULVANEY. But you can get that money upon completion? 

Mr. MURPHY. Right. It is up to us. When we finish, the sooner 

we finish, the sooner we get the money. With this money, we are 

up to—we are leaving it up to our good friends here in Washington 

to decide when and how we are going to get it. 

Chairman MULVANEY. And that is what I think a lot of people 

do not understand about the proposals is that retainage, which everyone in the industry is familiar with, you get when the project 

is finished. This 3 percent withholding is different. You do not get 

this 3 percent withholding back until you pay your taxes for the 

year in which the project finished. So you could finish a project in 

January of 2012 and not actually get your money until April 15th 

of 2013. So it is not retainage, although I have heard a lot of people 

say this is similar to retainage. It is just another 3 percent 

retainage. And it is actually much worse than that. 

We have asked a couple of folks—I will ask Mr. Frost and Mr. 

Gaffney and Ms. Sacilotto as well because I think you mentioned 

the legalities of this—why is another short-term extension not a solution? And I put that to anyone who wants to speak to it. 

Mr. GAFFNEY. For me personally, the problem I have is we just 

cannot afford—if I am bidding a project that is going on for two 


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years or three years and this could be implemented in the middle 

of the project, we are having to walk away from it. So I am not 

bidding the work today for any of the long-term projects just because of the fear that this could come into play in the backend of 

the project, in the last year of the project. We just cannot afford 

it. I just could not do that. So that is why it is impacting us today. 

Chairman MULVANEY. Ms. Sacilotto. 

Ms. SACILOTTO. Sure. Well, contracts every day are being entered 

into and some of those contracts are long-term contracts. They are 

not going—they are not just for the next couple of years. They are 

for the next five, seven, 10 years. And there are no provisions in 

the Federal Acquisition Regulation now that implement this 3 percent withholding. Yet, there are plenty of provisions that require 

the government to pay its bills on time and pay them in full. So 

we have a lot of instability in the market right now as contractors 

are trying to figure out, well, how am I going to deal with this. And 

contracting officers do not really have the tools necessary. As we 

can see, people are still trying to figure out how to implement this. 

So as contracts are being entered into now there is a great deal of 

uncertainty. Having instability in any market is obviously not a 

positive thing. 

Mr. FROST. And let me add to that, if I may. You mentioned that 

if it was delayed would that be helpful. And of course there would 

be some advantage there but you heard the gentleman from the 

Department of Defense speak to the fact that they are already 

planning for that and incurring costs associated with that planning, as is industry. And so if we are incurring costs when the ultimate outcome is going to hopefully be repeal of that mandate, then 

why not repeal it now? 

Chairman MULVANEY. And I think Mr. Loftis said the same 

thing. The states are doing the same thing in anticipation of it. 

Mr. FROST. Exactly. 

Chairman MULVANEY. Mr. Murphy, you had an addition? 

Mr. MURPHY. To me, putting it off another day does not help because it is still a bad policy. It is not going to be any better a year 

from now, or two years from now, or three years from now. 

Chairman MULVANEY. Mr. Murphy, you mentioned one thing— 

and this will be my final question—that caught my attention. You 

mentioned that the average margin to a contractor of your size, 3.2 

percent I think you mentioned. And then you mentioned that for 

a lot of the subs who are smaller than you it was down as low as 

1.6 percent. And I think that drove home for me how dramatic the 

impact—while the impact of this bill would be felt industry-wide, 

the smaller the business the more dramatic it would be. How would 

your subs be able to operate under this system? 

Mr. MURPHY. Like Mr. Gaffney said, some of these you would not 

be able to pass it on to them. They would just go out of business 

because a lot of these guys that we deal with, concrete finishers 

and some mason stuff, you have to pay them every week. You hold 

3 percent for a year on them, they would just go out of business. 

Or they would quit doing work with you. 

Chairman MULVANEY. Thank you very much. I will recognize Ms. 

Chu for as much time as she would like. 

Ms. CHU. Thank you. 


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I wanted to follow up on several of the issues you raised. Ms. 

Sacilotto. Ms. Sacilotto, one of the central themes of your testimony 

was that the 3 percent withholding rule undermines other government initiatives established to promote economic growth for small 

firms. Can you explain how those traditionally disadvantaged 

firms, such as minority-owned or women-owned firms would be impacted? 

Ms. SACILOTTO. Sure. I can give you—well, if a company cannot 

raise money to operate its business, obviously any policy that we 

put into effect, just at a broad level, is not going to be effective because it will be driven from the market. But a specific policy that 

is put into effect in the Federal Acquisition Regulation and even 

more so by DOD is to give small businesses a greater percentage 

of their progress payments. So a traditional large business, the default is 80 percent of your costs. Small businesses, depending on 

whether it is with a civilian agency or DOD, can get up to 95 percent of their progress payments. And there is also, you heard mentioned, a DOD policy that was recently enacted to accelerate payments to small businesses. Well, shaving off 3 percent is obviously 

directly undermining those policies that are meant to assist small 

business with contracting with the government. It undermines— 

the notion that you will get paid faster yet you will get paid less 

is not exactly equal. 

Ms. CHU. You also raised the issue pertaining to Federal Acquisition Regulation—complex federal contracting regulations already 

serve as a huge barrier to small firms seeking government work. 

Can you elaborate on how federal acquisition regulations would be 

modified if the 3 percent withholding became effective and what 

this would mean for small businesses in the contracting arena? 

Ms. SACILOTTO. Honestly, I think that the repercussions are 

going to be enormous. And I have not studied this but I have been 

thinking about recently the Prompt Payment Act. The Prompt Payment Act is a government law that was enacted because the federal 

government did not have rules about when it paid its invoices. So 

sometimes it was paying too late and incurring interest, and sometimes it was paying too early and losing the time value of its 

money. So the Prompt Payment Act has rules about when you pay 

your invoices. And if you do not pay your invoices on time, the contractor is entitled to interest. If the government pays early, there 

are certain clauses that are in the FAR, which is the Federal Acquisition Regulation, that allow the government to get a discount 

for paying early. 

It seems to me that the entire prompt payment system is going 

to be—is completely broken. If the government can essentially not 

pay promptly 3 percent of the payments that are owed, are they 

going to incur interest on that because they are not paying it 

promptly? And the idea of this was the government was realizing 

it was losing a vast amount of money—the time value of money by 

paying too early. Well, contractors are now losing that time value 

of money by paying their taxes early. So should the government get 

a discount for paying early when it is withholding 3 percent of the 

money? This is just one tiny little aspect of the contract process 

that I think will be affected by this 3 percent withholding. This applies to small businesses, large businesses, all businesses. And conVerDate Mar 15 2010 23:16 Jul 21, 2011 Jkt 067299 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\A299.XXX A299

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tracting officers and our acquisition workforce who are stretched 

thin already are going to have to try to figure out how to deal with 

this. 

Ms. CHU. And my final question has to do with those commercial 

item vendors, those small businesses that offer all kinds of items, 

including high tech products that would be available on the commercial market. In your testimony you mentioned that 3 percent 

withholding would disproportionately dissuade commercial item 

contractors. What is unique about this industry that would create 

this situation? 

Ms. SACILOTTO. Well, when you think about a commercial item 

contractor you are thinking about somebody who—a company that’s 

business is not tailored to, you know, perhaps building a bomb or 

something that is specific to the federal government. It is providing 

perhaps IT services and cloud computing and things that I do not 

even know about because they are so high tech and innovative. 

Well, they can sell their products out on the free market to companies, to businesses, to anybody. They do not have to necessarily— 

they are not beholden to the federal government for this. It is a 

great market to enter into but is it such a great market to enter 

into when I have this 3 percent withholding and every other cost 

of doing business? As a small innovative business, if I have options, 

this will definitely make me consider whether or not it is worth it 

to come into the federal marketplace. 

Ms. CHU. Thank you. I yield back. 

Chairman MULVANEY. I recognize the gentle lady from North 

Carolina, Ms. Ellmers, for up to five minutes. 

Ms. ELLMERS. Thank you, Mr. Chairman. 

Ms. Sacilotto, my question for you is you had outlined that there 

are already provisions in place that should be dealing with these 

issues as far as, you know, the revenue coming in, the tax burden, 

that we may be lost. Is that correct that you feel they are already 

in place? 

Ms. SACILOTTO. Yes. 

Ms. ELLMERS. And yet they are not being adhered to? 

Ms. SACILOTTO. Well, that I do not know from an IRS perspective 

whether or not they are being adhered to. I believe that a number 

of laws have been passed recently to allow the IRS to withhold 

more and more money. I would say that the recent GAO report 

that came out that the chairman mentioned, there were 15 cases 

of delinquent taxpayers that were, I guess, emphasized in that report. The IRS has gone after all 15 of them so I cannot say that 

it is not working. 

Ms. ELLMERS. Well, based on the information that we have and 

considering that there are things that are already in place, why do 

you, you know, it seems to me the impetus for this is to find this 

money, this 3 percent withholding in order to help pay for that or 

to find that or to locate those monies that might not be coming in 

and, you know, pretty much put that burden on all of our good taxpaying citizens because of those few that do not. If, in fact, those 

things that are already in place really do not seem to be working, 

why would this work? In your opinion, what would make this the 

golden egg of finding tax revenue? 


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Ms. SACILOTTO. Well, I do not think this is the golden egg of finding tax revenue. And like I said, I cannot say that those measures 

are not working. Some of the evidence suggests that they really 

are. And to go back to this GAO report, I would say that this—that 

report—it is unfortunate that there are contractors who do not pay 

their taxes. Nobody is going to defend that. But if you read the report, it was only five percent of the contracts that were actually examined. 

Forty-five percent of the taxes at issue that they found owing 

were excise—I am sorry, payroll taxes. They were non-income 

taxes. So will this help that? No. It will not get that entire 45 percent of the problem that was identified. Also, half of the delinquent 

taxpayers were subrecipients and I think in my mind I think of a 

subrecipient as a subcontractor. Well, subcontractors are not subject to the withholding. It applies to the prime contractor. 

Ms. ELLMERS. To the prime contractor. 

Ms. SACILOTTO. Right. So that is under the IRS rule. So you are 

not getting all of those people. So, right there that is not getting 

all of the problems. There was an addition. Oh, and then the fact 

that the IRS is actually—it is taking enforcement actions against 

all 15 of the cases that it said were known really bad actors. Well, 

that to me suggests that the system is not broken. That we need 

to just focus on using the tools that we have available already rather than adding an additional tool. 

Ms. ELLMERS. Thank you. 

Mr. Gaffney, if I am not mistaken I believe you had said that if 

this were to be put in place today it would cost you about 24 percent more to do business. 

Mr. GAFFNEY. Correct. 

Ms. ELLMERS. And you would literally have to close your doors. 

Is that correct? 

Mr. GAFFNEY. When I say that I know it sounds like it is dramatic. 

Ms. ELLMERS. No, no. It is not. 

Mr. GAFFNEY. It is the truth. In our business, you know, my 

mother is in the office, my sisters are in the office. When the girls 

are doing the accounting everyday downstairs we would actually 

have to come down, track down all our vendors which on a given 

project could be in the hundreds, make sure that the 3 percent is 

held from the vendor, from the subcontractor, from another material supplier, and so forth and so on. And 24 percent is probably 

a low number but I wanted to be conservative. And it will put us 

out for the reason that there is no money to the developers today. 

So in the Philadelphia area and the surrounding areas in Pennsylvania, there is no money for the developers. There is no cash flow 

out there. So a lot of the smaller businesses tend to go into the 

work that is either government at the state, local, whatever the 

case may be. With this 3 percent that goes in there, we just cannot 

do it. We cannot do it. 

For the most part, right now small businesses in my area are 

taking jobs for just about nothing, just to keep the money coming 

in so the bonding company is happy and the banks are happy for 

the line of credit. If it was not for that, we would be gone. With 


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that 3 percent being held for whatever the period of time is, it is 

coming. It is just a matter of time. 

Ms. ELLMERS. Thank you. Mr. Chairman, can I have one more 

minute for—I would like to ask Mr. Frost and Mr. Murphy—— 

Chairman MULVANEY. With no objection you are recognized for 

an additional minute. 

Ms. ELLMERS. Okay. Mr. Frost and Mr. Murphy, I just wanted 

to ask both of you, you know, as business owners, I believe, Mr. 

Murphy, you had said that basically this would—for your projected 

income of 2011 or your projected project it would cost you about 

$100,000. Is that—— 

Mr. MURPHY. Well—— 

Ms. ELLMERS. I am sorry, Mr. Frost, you had said—— 

Mr. FROST. We would lose about $130,000 of revenue if it was in 

today’s dollars. 

Ms. ELLMERS. Simply just to adhere to this? 

Mr. FROST. Yes. 

Ms. ELLMERS. In your opinion, how many jobs would—if you 

know that that is a cost that you are not going to have to incur, 

can you create—would you be able to go out today and hire someone else to work under you? 

Mr. FROST. It would be extremely difficult. As I said, our history 

has been that we have been hiring people and we have been able 

to do that because our cash flow has allowed us to. We would have 

to take loans if we were going to hire additional people to cover 

their payroll until we got paid by the federal government or the 

federal, state, and local governments. 

Ms. ELLMERS. Sure. And Mr. Murphy, if you could answer that 

as well. 

Mr. MURPHY. I agree with Mr. Frost and I will make one comment about cash flow. A guy told me this a long time ago. It is not 

air but it is pretty close to it. So it is that important. 

Ms. ELLMERS. Well, absolutely. And you know, again, and in your 

opinion for both of you, you know, if we just—if we just put this 

off for a few months or a year you are still going to be in the same 

situation because you are still going to be faced with that uncertainty. Correct? 

Mr. MURPHY. The uncertainty of it and the inevitability of it if 

it happens. I mean, it is not like it is going to be easier to take 

a year from now. 

Ms. ELLMERS. Right. Thank you so much for your testimony. I 

really—it has been invaluable to this situation. Thank you. 

Mr. MURPHY. Thank you. 

Chairman MULVANEY. Thank you, Ms. Ellmers. And that provides a good closing for the whole meeting. Thank you for everybody who came. Thanks especially to the folks who came from outof-town. I appreciate you incurring the time and the expense to do 

that. I do not think that folks who come to testify often recognize 

how important these hearings are and how valuable they can be to 

shed light on issues that ordinarily would not see the light of day. 

This is not an issue that makes the front page of the Wall Street 

Journal or the New York Times, but this is an absolutely critical 

issue for your economy, for our small businesses, and as you can 

tell, for state and local government, the Department of Defense. 


srobinson on DSK4SPTVN1PROD with HEARING
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This is an important issue and the fact that you were able to come 

today, give us your testimony in writing, have a chance to give us 

your oral testimony and then take questions is extraordinarily 

helpful to us as we try and push this bill through on what appears 

is going to be to all aspects a bipartisan basis. So I really appreciate—the anecdotes especially help us explain to our colleagues exactly how important this is, how powerful a change this would be 

if we do not fix it, so I appreciate everyone’s time. 

With that I would ask unanimous consent that we have five legislative days to submit statements and supporting materials for the 

record. And without objection, thank you all to everybody who 

came. And that will conclude this meeting. 

[Whereupon, at 11:35 a.m., the subcommittee was adjourned.] 


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CERTIFICATE OF NOTARY PUBLIC 

DISTRICT OF COLUMBIA 

I, Christine Allen, notary public in and for the District of Columbia, do hereby certify that the foregoing PROCEEDING was duly 

recorded and thereafter reduced to print under my direction; that 

the witnesses were sworn to tell the truth under penalty of perjury; 

that said transcript is a true record of the testimony given by witnesses; that I am neither counsel for, related to, nor employed by 

any of the parties to the action in which this proceeding was called; 

and, furthermore, that I am not a relative or employee of any attorney or counsel employed by the parties hereto, nor financially or 

otherwise interested in the outcome of this action. 

llllllllllllllllllll 

Notary Public, in and for the District of Columbia 

My Commission Expires: January 14, 2013 


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