Senate Finance Committee Chairman Ron Wyden plans to propose changes to a business deduction established in the 2017 tax law that would limit the break for the wealthy while making it more broadly available.
Wyden’s legislation, which is still being drafted, will take aim at a temporary deduction of up to 20% that is available under Section 199A for partnerships, LLCs, and other entities taxed only at the individual owner level. Wyden (D-Ore.), a vocal critic of the Trump-era tax code overhaul, will likely aim to start phasing out the deduction for individuals making above $400,000 in annual business income, with the perk unavailable for people making over $500,000.
The bill, which a Wyden aide said is expected to be formally introduced in the next few weeks, also will seek to expand the deduction to cover other businesses that don’t receive a partial or full deduction currently, like lawyers, accountants, or doctors making above certain income thresholds.
“I’m looking at ways to revamp the deduction to ensure it’s not just a giveaway to the top,” Wyden said in a statement provided by a spokesperson. “For example, phasing out the deduction at high income thresholds would allow us to fix the problems with the deduction for middle-class small business owners, including making more of them eligible by ending industry carve outs.”
Even after offering the deduction to a broader array of businesses, Wyden estimates the cap would raise tens of billions to help offset other Democrat initiatives, like the expanded Child Tax Credit, federal child care subsidies, and paid medical leave.
Changes to the pass-through deduction weren’t included in President Joe Biden’s infrastructure and social spending proposals, which rely on various other tax hikes to offset trillions in new spending. But Kimberly Clausing, deputy assistant Treasury secretary for tax analysis, said at a recent Urban-Brookings Tax Policy Center event that she “wouldn’t read much into the absence” of the 199A break from the administration’s plans so far.
Washington lobbyists told Bloomberg Tax in May that going after the deduction could open Democrats up to attacks that they are seeking tax hikes on small business owners, not just big business and the wealthy. The proposed expansion to currently excluded industries, which would widen the number of businesses eligible to claim the deduction, could blunt some of the likely criticism of the rest of the bill.
Several Democratic lobbyists tracking Biden’s economic agenda have predicted a full or partial repeal of the pass-through deduction could enter into the conversation to offset the costs of the administration’s spending priorities. Republicans so far have objected to re-opening any portions of the signature legislative achievement of the Trump administration: the 2017 tax law that created the pass-through deduction. Inserting a phaseout could be seen as crossing that “red line.”
“Clearly, Senate Republicans are not interested in revisiting the 2017 tax bill. I think the president and vice president understand that,” Senate Minority Leader Mitch McConnell (R-Ky.) said to reporters after leaving a meeting at the White House last month.
Though still in the final stages of drafting, the bill as written now would also seek to simplify claiming the deduction. Wyden’s bill would expand eligibility for the full deduction to businesses and professions not currently eligible for the entire break, though the phase out would limit the benefit for those in the high-end of earners claiming the deduction.
Wyden’s bill would aim to simplify the baseline deduction by using a filer’s individual taxable income as the basis, and allow a 20% deduction of their income from that business. The current pass-through benefit involves a more complicated calculation comparing 20% of the business income against 20% of the owner’s taxable ordinary income, excluding long-term capital gains.
Wyden also plans to keep the current 2025 expiration date for the deduction in place. That would keep it on the table for potential negotiations on a host of temporary tax policies to sunset at the same time, including individual tax cuts passed in 2017 and the Biden administration’s proposed extension of a more generous child tax credit.
—With assistance from Lydia O’Neal.