With the reconciliation bill process reaching its final stages,120 trade associations today called on the Senate to incorporate a key part of the House-passed bill: an expansion of the 199A deduction from 20 to 23 percent. As the letter states:
Expanding Section 199A will help preserve tax parity between pass-through businesses and larger public corporations while helping ensure the Senate bill does not raise taxes on millions of Main Street businesses.
The Section 199A deduction plays a vital role in preserving competitive neutrality in the Tax Code. The 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35 percent to 21 percent. In doing so, it left pass-through businesses – which pay taxes at much higher individual rates – at risk of a long-term competitive disadvantage. Section 199A was adopted to mitigate this imbalance and preserve a level playing field.
Why is an enhanced deduction necessary? Beyond being good policy, it also helps mitigate some of the tax hikes included in the Senate bill:
The Senate bill would make permanent the 199A deduction but also would cut in half their ability to deduct State and Local Taxes (SALT) as a business expense. The net result will be a tax hike on millions of pass-through businesses relative to what they currently pay.
Expanding 199A deduction would offset this tax hike. It builds on a policy with a proven track record. Since its enactment, Section 199A has helped tens of millions of Main Street businesses reinvest in their operations and workforce. Data from the IRS and Treasury confirm that the deduction’s benefits flow to job creators in every community and every congressional district in the country. The deduction represents a critical tool for weathering economic headwinds and remaining competitive in an increasingly consolidated marketplace.
The House-passed expansion to 23 percent is modest but meaningful. It ensures that the Tax Code reflects the economic reality pass-through businesses face and recognizes their role as America’s leading source of private-sector employment.
With the reconciliation bill nearing the finish line, the Senate has a real opportunity to deliver certainty, fairness, and economic strength to the backbone of the U.S. economy. Lawmakers should seize it by adopting the House’s 199A expansion and ensure that Main Street doesn’t shoulder a tax hike in the final package.