Unpopular 3% government contractor tax withholding is repealed

On Wednesday, the House overwhelmingly passed a tax bill that the Senate passed earlier this month.  The President said he will sign the bill.

First, the legislation repeals the three percent withholding on payments to federal and state government vendors that was scheduled to begin in 2013.  The withholding was originally enacted in the Tax Increase Prevention and Reconciliation Act of 2005.  The current effective date (payments made after December 31, 2012), occurred because of prior Congressional and IRS delays.  Repealing this withholding is estimated to reduce government receipts by $11 billion over ten years

Second, the legislation expands the work opportunity tax credit (WOTC).  Currently, the WOTC generally offers a credit of up to 40 percent of wages for workers employed for 400 hours or more, capped at $2,400 for most adult hires and $4,800 for unemployed disabled veterans.  The WOTC was scheduled to expire at the end of 2011.  The new law extends the WOTC through 2012 generally, and through 2013 for veterans. Additionally, the WOTC is increased as follows:

  1. $4,800 for hiring veterans who have been unemployed at least four weeks,
  2. $5,600 for hiring veterans who have been unemployed at least six months, and
  3.  $9,600 for hiring veterans with disabilities who have been unemployed at least six months.

These items will be paid by adjusting the income calculations involving eligibility for federal government subsidy of health care premiums. This health insurance is created by the 2010 health care bill (ObamaCare).  The insurance is required to be offered through state health insurance exchanges, beginning in 2014.  Because this federally-provided health care premium assistance is so expensive, relatively minor adjustments to the qualifying formula have a surprisingly large budgetary impact.  These income qualifications for premium assistance were already changed once to pay for the repeal of additional Form 1099 reporting.  This current change includes Social Security benefits in the income calculations, even if the Social Security benefits are excluded from income for income tax purposes.


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