Senate votes to repeal tax withholding law

Washington -- The Senate unanimously voted to eliminate a federal statute that is intended to prevent large government contractors from failing to pay their taxes but that also would reduce Medicare payments to some physicians. Final House action is expected soon.

Senators agreed to repeal the 3% tax withholding rule by a 95-0 vote on Nov. 10. The 2006 tax law has yet to be implemented, but many businesses that accept government money have urged Congress to eliminate the provision before it takes effect, because they say it would be overly burdensome.

For physicians, the provision would require 3% of Medicare payments to be withheld beginning in 2013 when a doctor or physician practice submits a bill for at least $10,000. The withheld money would be applied to the year's tax bill, so unless the physician or group were found to have outstanding tax obligations, they would receive the money back through the next tax return. But opponents argued that in these cases, the withholding would interfere with cash flow and amount to an interest-free loan to the government.

The American Medical Association supports eliminating the withholding requirement. A 20% gap already exists between Medicare payments and the actual costs of providing care, said AMA President Peter W. Carmel, MD. The 3% withholding rule would only widen that gap, he said.

The legislation approved by the Senate also would bring needed regulatory relief to hospitals and other contractors that do business with the government, said Chip Kahn, president of the Federation of American Hospitals. "We applaud the Senate, the House and the Obama administration for their strong support for repealing this onerous and expensive mandate, and we look forward to a final House vote and to President Obama quickly signing the repeal into law."

The House had approved a similar repeal measure by a 405-16 vote on Oct. 27. The House offset the $11 billion cost of the repeal by closing what lawmakers consider a coverage loophole in the health system reform law. The loophole would allow some people with incomes up to 400% of the federal poverty level to become eligible for Medicaid starting in 2014.

The Senate approved the same withholding measure and offset as the House, but as part of a broader measure that would provide federal tax credits to businesses that hire military veterans. The larger package would need to pass the House before going to the White House for Obama's signature. The president supports both the tax withholding repeal and the veterans tax credits.

The House is expected to take up the Senate bill when lawmakers return to Washington the week of Nov. 14.