Defense contractor loophole closed

According to the AP, President Bush closed a loophole yesterday that defense contractors had been using to avoid paying millions of dollars in payroll taxes. [emphasis mine]

Bush signed into law the Heroes Earnings Assistance and Relief Tax Act, which provides tax relief for military families. Included in the legislation is a provision that would treat foreign subsidiaries of U.S. government contractors as American employers. That means they now have to pay the taxes that finance Social Security and Medicare programs. [...]

Lawmakers wanted to end the practice, which has become widespread among American businesses. The Senate Finance Committee estimates that thousands of companies have registered in the Caymans to dodge taxes. The losers, the committee said, are ordinary Americans who foot a larger share of the bill to pay for programs that benefit the elderly and the disabled.

In an example of how much tax revenue was being lost, the Boston Globe reported in April that Kellogg, Brown, and Root, which receives an estimated $16 billion a year for defense contracts in Iraq, avoided close to $100 million a year in payroll taxes by hiring workers through foreign shell companies. That's a large chunk of the nearly $846 million in revenues that The Joint Committee on Taxation estimates will be brought in over the next 10 years by shutting that loophole.

I'm not sure if this will affect Blackwater Worldwide since they're headquartered in Moyock, N.C., but it should since they're violating IRS laws too according to Rep. Henry Waxman.

In a letter to Erik Prince, the Chairman of the Prince Group, which owns Blackwater, Rep. Henry Waxman wrote:

"I have received documents which suggest that Blackwater may have engaged in significant tax evasion. According to an IRS ruling in March 2007, Blackwater violated federal tax laws by treating an armed guard as an “independent contractor.” The implication of this ruling is that Blackwater may have avoided paying millions of dollars in Social Security, Medicare, unemployment, and related taxes for which it is legally responsible.

And according to McClatchy Newpapers:

Waxman’s staff looked at the most recent State Department contract and estimated that between May 2006 and March 2007, Blackwater avoided paying $15.5 million in Social Security and Medicare taxes and $500,000 in unemployment taxes.

That's a lot of tax money they owe the country, but Blackwater can afford it. Since 2001, they've been granted federal contracts worth more than $1 billion - contracts that are being paid for by taxpayers.

As Sen. John Kerry said earlier this year, "Failing to contribute to Social Security and Medicare thousands of times over isn't shielding the taxpayers they claim to protect, it's costing our citizens in the name of short-term corporate greed."


(Cross-posted at Blogging for Michigan.)