UPDATED November 21, 2011

President Obama today signed legislation to repeal a requirement that federal, state, and local governments withhold 3% of payments to their contractors beginning in 2013. The move marks the successful culmination of a years-long lobbying, grassroots, and advertising campaign by the Chamber, its members, and other business groups to erase the onerous mandate.

"By repealing the 3% tax withholding provision that was scheduled to take effect in 2013, Congress took an important step in lifting a cloud of uncertainty hanging over the business community," said Chamber Executive Vice President for Government Affairs Bruce Josten in a statement issued after Congress passed the bill last week.  "With passage of this legislation, many small businesses that operate on tight margins will feel more comfortable making decisions to hire and invest in their companies knowing that the government won’t be allowed to hold 3% of their revenues."

The 3% withholding tax was enacted in 2005 as a way to close the gap between taxes owed and taxes paid, but its implementation had been delayed several times in the years since. Had it gone into effect, it would have had a dramatic negative impact on millions of honest taxpaying businesses as well as state and local governments, health care providers, farmers, and colleges and universities, according to the Chamber. Because many businesses operate with a profit margin of less than 3%, a withholding tax would create significant cash flow problems for day-to-day operations as well as drain capital that could be used for job creation and business expansion. In addition, contractors would incur the extra costs of preparing for and complying with the tax provision.

To pay for $11 billion in forgone revenue that 3% withholding was expected to generate over 10 years, the repeal legislation changes the way last year’s new health care law determines who is eligible for Medicaid and health exchange subsidies. The shift is expected to save $13 billion.