The Government has not mandated Level 3 processing yet, however GSA has added level 3 processing as a requirement for some contracts.
Whether required to pass level line item detail or not, If properly set up Level-3 provides significant advantages for merchants who process commercial and government credit card transactions. Its not only for your government transactions either.
Non government commercial transactions also qualify for the Level 3 reduced interchange levels.
Special rates where created to support level 3 data and can reduce transaction cost by up to 40%. This can be as high as 1%-1.50% vs not sending level 3 line item data. Since level 3 is in demand from federal buyers it can help give you and edge over competitors while significant reducing your transaction cost.
Evidence of the importance of level 3 processing can be found in the point of sale discounts link below.