STATEMENT
of the
Honorable Nydia M. Velázquez, Chairwoman
House Committee on Small Business
Hearing on “The Hidden Tax on Small Businesses”
March 22, 2007

Today’s hearing focuses on what might seem to be a minor change in tax law, but will have a huge affect on small businesses across this country.  We will discuss the potential problems of a provision passed last year that would require the government to withhold 3 percent on many government payments. 

While the withholding requirement is not scheduled to become effective until 2011, it is important understand the problems now.  This change goes far beyond those who do business with the federal government.

Farmers who receive payments from the USDA, health care providers who receive Medicare reimbursements, as well as the thousands of small businesses who perform contract work for the federal government will all be hit with this 3 percent withholding.  This money will be withheld regardless of what you actually owe in taxes.

This could be an enormous burden across the board, but especially for small businesses.  While 3 percent may not seem to be a significant amount, it can mean the difference between meeting payroll, expanding a company or buying needed equipment.  Cash flow is a major issue for small companies.  If they have money withheld on every payment they receive, it will reduce their ability to compete against their corporate counterparts.

For small government contractors, the results could be severe.  When you consider that small firms are continuing to be squeezed out of the federal marketplace, the last thing Congress should be doing is creating another obstacle to their success.

Small firms, which often have fewer resources, may be unable to afford to stay in the market.   Furthermore, if businesses leave the federal marketplace, there will be less competition.   Limiting competition will lead to higher prices—costing valuable taxpayer dollars. 

The change will also have a negative impact on the health care industry.  Putting aside the cash flow issue, the shear volume of transactions affected by this change creates a huge administrative burden.  Hospitals and small business health care providers conduct millions of transactions that will be subject to withholding. 

That means the health care industry must ensure every Medicare payment they receive meets the three percent requirement. 

I believe the intent of this provision was a good one.  Right now, there is a $350 billion tax gap because many are not reporting income and paying taxes on that income.  However, I question whether this change will really get at that problem. 

Most of the revenue generated by this provision does not come from collecting taxes, but from a budget gimmick.  It simply moves up the collection of money that would have come in the next year.

We must consider the hidden costs of this legislation.  Small businesses already face enough problems and we should not increase the cost of running a business by requiring an interest free loan to the government. 

It seems to me that the most logical step is to repeal the provision.  There are better ways to crack down on those who are not paying their taxes without creating a hardship on small businesses.  I appreciate the witnesses coming here today to talk about their concerns. 

I look forward to today’s discussion.