On Tuesday, November 15, 2011, the House is scheduled to consider the Senate amendments to H.R. 674, a bill to amend the Internal Revenue Code of 1986 to repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities, under a suspension of the rules requiring a two-thirds majority vote for approval. H.R. 674 was introduced by Rep. Wally Herger (R-CA) on February 11, 2011, and was referred to the House Committee on Ways and Means. On October 13, 2011, the Ways and Means Committee held a mark-up and reported the bill by voice vote. On October 27, 2011, the House approved the bill by a vote of 405-16. On November 10, 2011, the Senate approved an amended version of the bill by a vote of 95-0.
The Senate amendment to H.R. 674 would amend the bill to establish new job training programs and requirements for Armed Forces members separating from active duty, create additional requirements for veterans’ job training programs, and increase tax credits for employers to hire qualified members of the Armed Forces following their service. The bill would also permanently repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities. In addition, the bill would require all Social Security and Tier 1 Railroad Retirement benefits to be included as part of modified adjusted gross income (MAGI) for purposes of determining eligibility for certain Medicaid applicants and subsidies for health insurance purchased through the new health insurance exchanges to be established under the Patient Protection and Affordable Care Act. According to CBO, the provisions in the Senate amendment to H.R. 674 would have the accumulative budget impact of reducing the deficit by $1.98 billion over the FY 2012 – FY 2021 period.
TITLE I—REPEAL OF THE 3% WITHHOLDING REQUIREMENT
The Senate amendment to H.R. 674 would retain House-approved language to amend the Internal Revenue Code of 1986 to permanently repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities. Currently, the imposition of the 3 percent withholding is set to take effect on January 1, 2013. If the 3 percent withholding tax were implemented as scheduled, government entities would be required to withhold 3 percent of payments to persons providing property or services. For example, on an invoice for $20,000 the government would pay the business $19,400 and withhold $600 as a preemptive tax. Government entities include the government of the United States, as well as every state and local government. However, local governments with less than $100 million of annual expenditures for property or services would be exempted from the requirement. This provision—which was originally enacted as part of a larger package featuring numerous other significant tax changes—was purportedly intended to improve tax compliance. According to the Joint Committee on Taxation, repealing this requirement would reduce federal revenues by $11.2 billion over the 2012–2021 period.
TITLE II—VOW TO HIRE HEROES
Veterans Retraining Assistance Program: The bill would establish a program, beginning no later than July 1, 2012, to provide employment and training services to veterans and servicemembers separating from active duty service. The bill would provide up to 12 months of Veterans Retraining Assistance to no more than 99,000 unemployed veterans that enter education or training programs at community colleges or technical schools to prepare them for employment in an occupational field that is determined by Department of Labor (DOL) to have significant employment opportunities. The monthly amount of assistance payable to participating veterans would equal the maximum monthly amount of basic assistance payable under the Montgomery G.I. Bill. For 2011, that rate is $1,426 per month. To qualify for the retraining assistance, veterans must be:
Of the total number of veterans that qualify for retraining assistance, only 45,000 may enter the retraining program in fiscal year 2012 and only 54,000 may enter the program between October 1, 2012, and March 31, 2014. The bill would require the Secretary of Veterans Affairs to issue a report by July 1, 2014, on the retraining program.
Under the bill, payments made under this section would be made from amounts appropriated to the Department of Veterans Affairs for the payment of readjustment benefits. Not more than $2 million would be made available for information technology expenses (not including personnel costs) associated with the administration of the program. The program would terminate on March 31, 2014.
Mandatory Participation in Transition Assistance Program: Under current law, separating servicemembers are not required to participate in the employment and job training workshops provided as an element of the Defense Department's Transition Assistance Program (TAP). The bill would require that all servicemembers separating from active duty participate in those workshops. The bill would allow the Secretary of Defense and the Secretary of Homeland Security to waive the requirement for groups of members based on the Secretaries’ belief that the exempted members are unlikely to face major readjustment, employment, or other challenges associated with transition to civilian life. In addition, the requirement could be waived for “individual members possessing specialized skills who, due to unavoidable circumstances, are needed to support a unit’s imminent deployment.”
Individual Assessment of Skills Developed in the Military and Qualifications for Civilian Employment in the Private Sector: The bill would require the Secretary of Labor to enter into a contract with a qualified organization to conduct a study to identify any equivalences between the skills developed by members of the Armed Forces and the qualifications required for various positions of civilian employment in the private sector. In addition, the bill would require the Secretary of Defense to ensure that each member of the Armed Forces who is participating in TAP receives an individualized assessment of the various positions of civilian employment in the private sector for which such member may be qualified.
Transitional Assistance Program Contracting: The bill would require the Secretary of Defense to enter into contracts with private entities to provide the following services for servicemembers who are being separated from active duty:
The Secretary would be required to enter into contracts under this section within two years of enactment.
Two Year Extension of VA Rehabilitation: The bill would provide a two-year extension of the authority of the Secretary of Veterans Affairs to provide rehabilitation and vocational benefits to members of the Armed Forces with serve injuries. The bill would extend current authority from December 31, 2012, to December 31, 2014.
Expansion of Authority to Pay Employers for Training: The bill would authorize the Secretary of Veterans Affairs to make payments to employers for providing on-job training to veterans, on a case-by-case basis, if the Secretary determines that such payment is necessary to obtain needed on-job training or to begin employment. Under current law, the Secretary is only authorized to make such payments to “veterans who have been rehabilitated to the point of employability.”
Training and Rehabilitation for Veterans with Service-Connected Disabilities: The bill would provide additional vocational rehabilitation programs for individuals with service-connected disabilities who have exhausted their rights to unemployment benefits under state law. The additional rehabilitation benefits would expire for all applications the Secretary of Veterans Affairs receives after March 31, 2014.
Collaborative Veterans’ Training Program: The bill would require the Secretary of Veterans Affairs to award two-year grants to eligible nonprofit organizations to provide training and mentoring for eligible veterans who seek employment. The bill would authorize $4.5 million over FY 2012 through FY 2013 for the program. The Secretary would be required to report to Congress within six months of enactment on the process for awarding grants, the recipients of the grants, and the collaboration with veterans' outreach specialists and the appropriate state and local boards. Within 18 months, the Secretary would be required to assess the results of the program.
Pilot Program for Members of the Armed Forces on Terminal Leave: The bill would authorize the Defense Department to establish a two-year pilot program to assess the feasibility and advisability of providing servicemembers on terminal leave with work experience with civilian employees and defense contractors to facilitate the servicemembers’ transition to employment in the civilian labor market.
Credentialing and Licensing of Veterans: The bill would modify existing veterans’ credentialing and licensure programs that expired Sept. 30, 2009. The bill would require the Secretary of Veterans Affairs to select no more than five military occupational specialties for a demonstration project to match those skills with civilian employment in an industry with high demand for workers, and extends the program for two years beginning on the date of enactment. The Secretary would be required to enter into a contract with an appropriate entity representing a coalition of state governors to identify requirements for credentials, certifications and licenses that demand the same skills required by the military occupational specialties.
Wounded Warrior Tax Credits: The bill would provide new tax credits for employers for hiring qualified veterans and increase and extend the amounts of tax credits that already exist. The bill would extend the expiring Work Opportunity Tax Credit (WOTC) for hiring qualifying veterans for one year, through December 31, 2012. For all other targeted groups, the WOTC would still expire at the end of 2011 under the Senate amendment.
Under the bill, veterans with a service-connected disability who are unemployed at least six months (aggregated) during the year preceding the hiring date, the current credit would be increased under the bill to 40 percent of first-year wages up to $24,000 (for a credit of $9,600). For veterans with a service-connected disability who have been discharged or released from active duty within one year of the hiring date, the current credit would remain 40 percent of first-year wages up to $12,000 (for a credit of $4,800).
Under the bill, veterans who have been unemployed for more than six months (aggregated) for the one-year period prior to the hiring date, the credit would be equal to 40 percent of first-year wages up to $14,000 (for a credit of $5,600). For veterans who have been unemployed for at least four weeks but less than six months (aggregated) for the one-year period before the hiring date, the credit would be equal to 40 percent of first-year wages up to $6,000 (for a credit of $2,400). For qualifying veterans who work less than 400 hours, the credit amount would still be reduced to 25 percent of qualifying first-year wages under the bill.
The bill would also change the certification process for qualifying veterans required to establish periods of unemployment. Under the Senate amendment, an employer would have one year from the hiring date to certify that a veteran received unemployment compensation for the appropriate time period. Thus, for certain qualifying veterans, the proposed certification process would supersede the current certification process.
Also under the bill, tax-exempt organizations hiring qualifying veterans would be made eligible for a credit against their Social Security payroll tax liability as determined for all of their employees. The credit would be equal to the lesser of the WOTC credit (determined under the newly expanded and extended rules) and the tax-exempt organization’s total Social Security tax liability for all employees. Only wages paid to a qualifying veteran for services that further the employer’s tax exemption would count toward the credit. The amount of revenue that would otherwise be foregone to the Social Security Trust Fund as a result of the reduction in payroll taxes paid by tax-exempt organizations under this provision would be replaced with General Fund transfers of the same amount.
Pensions for Veterans in Medicaid Nursing Homes: The bill would extend a reduced pension (a maximum of $90 a month) for certain veterans and survivors of veterans living in Medicaid nursing homes through September 30, 2016. Under current law, the provision is set to expire on May 31, 2015.
Reimbursement for Ambulance Services: The bill would authorize the Secretary of Veterans Affairs to pay the provider of ambulance transportation of a veteran to a VA facility the charge for the transportation or the amount determined by the fee schedules established under the Social Security Act, whichever is less, unless the VA has entered into a contract with the provider for that transportation.
Modification of Certain Loan Guaranty Fee for Certain Subsequent Loans: The bill would extend the current level of a number of housing loan fees collected from participating veterans through October 1, 2016. The current fee levels are set to expire on November 18, 2011, under current law.
TITLE III—OTHER PROVISIONS RELATING TO FEDERAL VENDORS
One Hundred Percent Levy For Payments to Federal Vendors Relating to Property: The bill would authorize the Internal Revenue Service (IRS) to levy up to 100 percent of “property, goods, or services,” including payments to Federal contractors and vendors that are delinquent on their taxes, until the liability is paid or the IRS releases the levy. Under current law, the IRS may levy up to 100 percent of certain “specified payments,” including payments to Federal contractors and vendors that are delinquent on their taxes with respect to Federal payments to vendors of “goods and services.” The bill would replace “goods or services” with “property, goods, or services” to include payments made for the sale or lease of real estate and other types of property not considered “goods or services.” According to CBO, this provision would raise $135 million in new revenue over ten years.
Study on Taxes Owed by Government Contractors: The amended version of the legislation would direct the Treasury Department, in consultation with the Office of Management and Budget (OMB) to conduct a study on ways to reduce the amount of federal tax owed but not paid by federal government contractors. The study would include an estimate of the amount of delinquent taxes owed by federal contractors, the extent to which contractor certifications on delinquent tax debts has improved tax compliance and been a factor in whether a contract continues, and the factors taken into consideration in awarding contracts to tax-delinquent contractors. Under the bill, the study would be required to be completed 12 months after the date of enactment and be submitted to the Committee on Ways and Means, the Senate Committee on Finance, the House Committee on Oversight and Government Reform, and the Senate Committee on Homeland Security and Government Affairs.
TITLE IV—MODIFICATION OF CALCULATION OF MODIFIED ADJUSTED GROSS INCOME FOR DETERMINING CERTAIN HEALTHCARE PROGRAM ELIGIBILITY
The bill would require all Social Security and Tier 1 Railroad Retirement benefits to be included as part of modified adjusted gross income (MAGI) for purposes of determining eligibility for certain Medicaid applicants and subsidies for health insurance purchased through the new health insurance exchanges to be established under the Patient Protection and Affordable Care Act (the Democrats’ healthcare takeover, P.L. 111-148). According to CBO, the net impact of the bill would be to reduce Medicaid enrollment, increase the number of people who purchase health insurance through the health insurance exchanges, and slightly increase the number of people with employer based coverage and the number who are uninsured. As a result, CBO estimates that the bill would reduce deficits by $13 billion over the 2012–2021 period.
Background on 3% Withholding Repeal
On May 17, 2006, the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) was enacted. Among a number of other provisions, the bill included Section 511, titled, “Imposition of Withholding on Certain Payments Made by Government Entities.” Section 511 required the imposition of a preemptive 3 percent withholding tax on payments for goods and services to contractors made by all branches of the federal government and its agencies and all units of state and local governments, including counties and parishes. Traditionally, wages and certain other payments are already subject to withholding of income tax, which employers are required to collect and submit to the government. Generally, the withheld amount is held as a credit against the taxpayer’s tax liability and is refunded if the tax liability is less than the amount withheld, or additional taxes may be due if the amount withheld is less than the actual tax liability. Prior to the passage of P.L. 109-222, a withholding tax was not required from payments made by government entities. Under the law (and subsequent delays), the 3 percent withholding tax on payments by government entities will become effective on January 1, 2013.
According to the Congressional Research Service (CRS), the 3 percent withholding tax on payments by government entities was conceived of as a means for the IRS to improve tax compliance and lower its tax gap, which is the difference between the amount of money the IRS is legally due in a given year and the amount of money the IRS actually receives. In addition, the provision served as means to increase revenue and offset other revenue reductions in the bill. Under the legislation, the 3 percent withholding tax was scheduled to take effect on January 1, 2011. According to the Joint Committee on Taxation’s (JCT) original estimate for 2006, this provision would have raised revenues by $6.97 billion over the FY 2011 – FY 2015 period. However, the Democrat’s original $1.2 trillion “stimulus” (P.L. 111-5) was enacted on February 17, 2009, and it included a provision to delay implementation of the 3 percent withholding tax until after December 31, 2011. On May 5, 2011, the IRS issued final regulations (T.D. 9524) that delayed the implementation of the 3 percent withholding tax on government contractors until January 1, 2013. Thus, without the enactment of legislation to repeal the 3 percent withholding tax on government payments to vendors, the tax will go into effect on January 1, 2013.
Opposition to the imposition of the 3 percent withholding tax began relatively soon after the passage of P.L. 109-222. As early as March 22, 2007, the House Small Business Committee held a hearing on the “Potential Effects on Small Businesses of 3 Percent Withholding Provisions on Government Contracts.” When the provision was delayed by the first stimulus bill, JCT explained the delay by saying, “The Congress believes that the three-percent withholding requirement was not appropriately targeted to the noncompliant taxpayers for whom it was originally intended and may impose significant and costly administrative burdens on state and local governments.” Indeed, the cost of complying with the withholding tax could adversely affect many businesses, especially those businesses with relatively small profits and tax liabilities. Overwithholding will occur if a business has a low profit margin or an income tax liability that is relatively low. Thus, some businesses would effectively provide the federal government with an interest-free loan. In addition, compliance costs would impose new burdens on financially strapped small businesses and impede necessary cash flow during an unemployment crisis. These added costs would almost certainly translate into fewer private-sector jobs and higher costs for the government and taxpayers.
A number of outside organizations and employer advocates have publicly opposed the imposition of the 3 percent withholding tax and have called for its permanent repeal. Notably, the Chamber of Commerce has repeatedly called for the repeal of the 3 percent withholding tax. According to the Chamber, which represents the interests of more than 3 million businesses, “The 3% Withholding Tax will mandate that federal, state, and local governments withhold 3% from payments for goods and services, not only causing an unprecedented paperwork burden for the government and companies who provide goods or services to them, but forcing firms to increase costs to offset the impact of delayed payments and disrupting businesses’ cash flows.” Calls for the total repeal of the withholding tax from job creators have prompted bipartisan support for H.R. 674, which as of October 25, 2011, had 269 co-sponsors, 62 of whom were Democrats.
Background on Modified Adjusted Gross Income (MAGI) Calculation
On March 23, 2010, the president signed the Patient Protection and Affordable Care Act (P.L. 111-148), otherwise known as the government takeover of healthcare. The legislation provides a refundable tax credit known as the “premium assistance credit” for eligible individuals and families who purchase health insurance through an exchange. The premium assistance credit is available for those with household incomes between 100 and 400 percent of the Federal poverty level (“FPL”) for families who do not receive health insurance through an employer. According the Joint Committee on Taxation (JCT), “The premium assistance credit amount is determined based on the percentage of income the cost of premiums represents, rising from two percent of income for those at 100 percent of FPL for the family size involved to 9.5 percent of income for those at 400 percent of FPL for the family size involved.”
Under the legislation, the definition of income for eligibility for certain Medicaid populations and premium credits in the exchanges is based on modified adjusted gross income (MAGI). Under the bill’s definition of income, some types of income including non-taxable Social Security and pension benefits are excluded from the calculation of MAGI when determining eligibility for Medicaid and premium subsidy benefits. According to the Congressional Research Service (CRS), “By excluding some types of income, individuals and families with a higher percentage of total income relative to the federal poverty level may qualify for Medicaid and premium credits.”
According to the bill’s sponsor, the Affordable Care Act’s exclusion of Social Security benefits as income when determining the subsidy for health insurance deviates from other eligibility requirements for federal assistance. According to the opening statement made by the bill’s sponsor, Rep. Black (R-TN), at the bill’s markup, “Supplemental Security Income, Supplemental Nutrition Assistance Program (food stamps), Temporary Assistance to Needy Families, Low-Income Home Energy Assistance Program, and public housing, all include the entire Social Security benefit as income.”
By not including certain benefits as income when calculating eligibility under the government takeover of healthcare, concerns have been raised that many people far beyond the intended poverty level will be eligible to participate in Medicaid or receive insurance subsidies. According to House Report 112-254:
Among the numerous concerns about PPACA and HCERA that have been discovered since their enactment in 2010, are concerns about the definition of modified adjusted gross income used to determine eligibility for the exchange subsidies, Medicaid, and other health programs. Since enactment, press reports have revealed that the law's definition of income excludes the non-taxable portion of Social Security benefits, significantly understating the financial resources available to certain households. Subsequently, Administration officials, including the Chief Actuary at the Centers for Medicare and Medicaid Services, have confirmed that millions of such households will be eligible for subsidized health insurance that, in many cases, was designed for those with fewer financial resources. In contrast, many other Federal means-tested programs define income, for purposes of determining income eligibility, to include the entire Social Security benefit, rather than just the taxable portion.
Treating Social Security income as modified adjusted gross income for health insurance assistance programs was recommended in a larger deficit reduction plan submitted by the White house in September. According to the Obama Administration, “Starting in 2014, eligibility for Exchange tax credits and cost sharing reductions, Medicaid, and CHIP will be determined based on an individual’s or families’ MAGI, as defined under the Affordable Care Act. Similar to legislation currently under consideration by the Congress, the Administration proposes to amend that definition to include the total amount of Social Security benefits in the calculation of MAGI, rather than just the taxable portion, when determining eligibility for these programs to better target those in need.” H.R. 2576 would include Social Security benefits when calculating MAGI.
According to CBO, the provisions in the Senate Amendment to H.R. 674 would have the accumulative budget impact of reducing the deficit by $1.98 billion over the FY 2012 – FY 2021 period. According to CBO, Titles II and IV would have a combined impact of reducing direct spending by $20.25 billion over ten years. In addition, Titles I, II, III, and IV would reduce revenues by a combined total of $18.26 billion over the same period. Thus, the total deficit impact of the bill would result in a $1.98 billion reduction in the deficit over ten years.