New Tax Withholding Rule will Cut Construction Jobs, Raise Government Costs

AGC contractors say they will raise bids and cut employment, just as the industry is showing recovery

63% of AGC contractors say their profit on government contracts is 3% or less, meaning the withholding rule will force tehm to carry a loss until their taxes for the year are paid.
63% of AGC contractors say their profit on government contracts is 3% or less, meaning the withholding rule will force tehm to carry a loss until their taxes for the year are paid.
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Even as new construction employment data shows more states adding construction jobs in September than losing construction jobs, a new federal tax withholding measure threatens to undermine construction hiring and punish taxpayers, according to analyses by the Associated General Contractors of America. The federal rule will force all large municipalities and school districts, all states and all federal agencies to withhold 3 percent of every payment to every contractor until contractors finalize their tax returns for the year.

“The last things the construction industry needs are measures that will make it harder for construction firms to hire, raise capital, invest in new equipment and, ultimately, succeed,” said Ken Simonson, the association’s chief economist. “Unfortunately, a new federal tax withholding measure will devastate a construction industry on the brink of recovery.”

Simonson noted that, according to an analysis of new employment data by the association, 26 states and the District of Columbia added jobs between September 2010 and September 2011. Texas (35,400 jobs, 6.3 percent) added the most construction jobs while North Dakota (23 percent, 4,900 jobs) added the highest percentage of construction jobs during the past year. In addition, 27 states added jobs between August and September. Texas (7,200 jobs, 1.2 percent) added the most jobs while Alaska (6.1 percent, 900 jobs) experienced the highest percentage increase in construction employment during the past month.

The construction economist noted that construction employment declined in 24 states during the past year and in 22 states and D.C. during the past month. (Construction employment levels were unchanged in Tennessee during the past month.) Georgia lost the most construction jobs during the past year (-13,900 jobs, -9.3 percent) and past month (-5,200 jobs, -3.7 percent). Georgia also experienced the highest percentage decline in construction employment during the past month while New Mexico (-9.5 percent, -4,100 jobs) lost the highest percentage of jobs during the past year.

Association officials cautioned, however, that  construction employment gains would likely be jeopardized by the new federal 3 percent withholding rule starting in 2013.

According to a nationwide construction industry survey the association conducted, 55 percent of construction firms report that public projects accounted for more than half of their revenue in 2010. Meanwhile, 63 percent of firms report that their average profit margin for public projects was less than 3 percent. This will force contractors to carry a loss on public work for months each year.

“The more contractors are forced to temporarily plug budget holes, the more the economy will suffer,” said Stephen E. Sandherr, the association’s Chief Executive Officer. “This is nothing but an interest-free loan from contractors back to the federal government.”

Nearly all – 97 percent – firms report the tax measure will make it harder and more expensive to attract capital and bond projects, the survey found. In addition, 49 percent of firms report the tax measure will force them to hire fewer employees while 65 percent say the measure will force them to cut back on equipment purchases.

The measure won’t just hurt construction firms and workers, Sandherr added. He noted that 67 percent of firms report they will increase the amount they charge for public construction projects because of the measure. Another 11 percent plan to bid on fewer public projects because of the tax withholding rule. Fewer bidders and higher bid levels mean taxpayers will have to pay more for public construction projects, the association head noted.

Sandherr added that it was encouraging that many officials in Washington have begun to appreciate just how devastating the tax withholding measure will be for employers and the economy. He said the House of Representatives was planning to vote for a full-repeal of the tax measure as early as the week of October 24th.

He added that 57 Senators voted to allow legislation to repeal the tax withholding measure to move forward in the Senate last night. Unfortunately, the measure needed 60 votes to proceed. Assuming similar repeal legislation passes in the House next week, Sandherr said he hopes the Senate will again consider, and this time pass, this desperately needed measure.

“Helping businesses hire and expand ought to be more important than forcing them to make an interest-free loan to the federal government,” Sandherr said. “After all, the only reason this measure was enacted in the first place was to give Congress an extra $12 billion in temporary funds.”

Over 1,300 construction firms from every state, the District of Columbia and Puerto Rico participated in the survey regarding the 3 percent tax withholding rule, Sandherr noted. He said the survey was conducted during the summer, and that construction firms were asked to answer a series of questions on-line. He noted that the cross-section of firms responding to the survey closely mirrors the broader industry.

Click here for an analysis of the survey results.

Click here for state employment data.