The Tax Increase Prevention and Reconciliation Act was signed on May 17, 2005. The new law would require federal, state and local governments and agencies procuring more than $100 million or more on an annual basis to withhold 3% of the entire contract amount from any company providing goods and services.

The intent of the law is to ensure firms pay taxes on revenues from public clients and reduce the number of deadbeat taxpayers.

The purpose of this paper is simply to apply basic economics to the law and develop a framework for the possible outcomes of the law. The law has not taken effect and there is no data to perform an empirical analysis.