Top Democrat offers bill to overhaul tax break for business owners

Senate Finance Committee Chairman Ron Wyden (D-Ore.) on Tuesday released a bill that would overhaul a deduction for noncorporate business income that was created by Republicans’ 2017 tax law.

The proposal comes after key Senate Democrats last week reached an agreement on a $3.5 trillion budget plan, and it comes as Democrats are discussing how to pay for their spending priorities.

“This bill is a win-win,” Wyden said in a statement. “It’s going to make the policy more fair and less complex for middle-class business owners, while also raising billions for priorities like child care, education, and health care.”  

The GOP tax law created a 20-percent deduction for income from noncorporate businesses known as “pass-throughs,” which pay taxes through the individual code on their owners’ returns. There are both large and small businesses organized as pass-throughs.

Wyden raised several issues with the deduction. He highlighted a 2018 estimate from the Joint Committee on Taxation finding that much of the benefit of the deduction would go to high-income households. He also noted that the deduction is currently designed so that business owners in some industries can benefit more from the tax break than business owners in other fields.

Owners of service businesses, such as law and accounting firms, face restrictions on the deduction that apply for 2021 to single filers with income of above $164,900 and married couples with income above $329,800. 

“Half the benefit of the pass-through deduction goes to millionaires, and because the benefit is so skewed toward the top, many Main Street small business owners are excluded,” Wyden said. “The mega-millionaires get to write off 20 percent of their income while middle-class accountants are cut out. This makes no sense, and my bill would overhaul the deduction to ensure its benefitting Main Street small businesses.” 

Wyden’s bill would phase out the deduction for households with income above $400,000 and would remove industry-related rules about eligibility. It would also streamline how the deduction amount is calculated.

Wyden released his proposal as Democrats are seeking to pass a wide-ranging spending bill later this year without Republican votes, and are working to determine how to finance such a measure. The budget deal announced last week would facilitate spending in areas such as health care, education and clean-energy investments and would be paid for through means that include unspecified tax increases on high-income households and corporations.

Changes to the pass-through deduction could be an appealing way for Democrats to raise revenue.

Wyden said on a call with reporters Tuesday that he’s “encouraged” about his proposal’s prospects.

“Senate Democrats are strong advocates for small business and protecting them from additional taxes, and they’re interested in making sure we can do that without violating the principle of tax fairness,” he said.

Wyden’s bill has the the support of some small business groups.

The bill “will raise substantial much-needed money, eliminate burdensome complexity, and refocus the [pass-through] tax deduction to where it’s needed the most,” said John Arensmeyer, founder and CEO of Small Business Majority.

However, some other business groups, as well as Republican lawmakers, argue that an overhaul of the tax break would amount to a tax increase on small businesses.

“Republicans have been warning that Democrats in Congress and the White House are coming after small businesses, and we are right,” Rep. Kevin Brady (R-Texas), the top Republican on the House Ways and Means Committee, said Tuesday on a separate call with reporters. “Democrats would eliminate the small-business deduction for many of our Main Street businesses.”

Kevin Kuhlman, vice president of federal government relations at the National Federation of Independent Business, said in a statement that Wyden’s bill “would directly hurt small businesses’ ability to hire, invest in their businesses, and increase employees’ compensation, and threatens the fragile economic recovery.”

Senate Democrats’ budget deal calls for a prohibition on tax increases on small businesses. Wyden argued that his proposal adheres to this guideline.

“Let’s be clear: Democrats are not raising taxes on true Main Street small businesses. In fact, this proposal cuts taxes for Main Street small businesses,” Wyden said in a statement to The Hill. “We’re also not going to let Republicans and their special interests falsely characterize every mega-millionaire as a small business.”

– updated at 11:54 a.m.