The 3% withholding provision was part of Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) which was repealed by Congress in November 2011.
The effective date for the provision was originally January 1. 2011 but was delayed one year by the American Recovery and Reinvestment Act (P.L. 111-5).
This provision mandated that federal, state, and local governments withhold 3% from nearly all contract payments, Medicare payments, farm payments, and certain grants. The Government Withholding Relief Coalition argued that compliance with this law imposes significant and unnecessary financial burdens on both the public and private sectors and should be repealed.
The repeal of the 3% withholding provision gained momentum in Fall 2011. The Office of Management and Budget has released a statement of policy in support of H.R. 674, which would eventually pass the House and Senate and was signed by President Obama on November 21, 2011.
icma and big 7 outreach
ICMA and other Big 7 partners have signed on to letters submitted by the Government Withholding Relief Coalition:
In late November 2011, President Obama signed a bill which includes a repeal of the 3% withholding provision. H.R. 674 passed the House in late October, and was passed in the Senate with an included amendment providing for tax credits for employers who hire unemployed veterans. The amended version was passed by the House and subsequently signed into law by the President.