Original post: Section 199A: Boosting Business or Busting Budgets? – Taxpayers for Common Sense
As part of its sweeping reconciliation proposal, the House Ways and Means Committee has included significant changes to Section 199A. Under current law, this 20% deduction is scheduled to expire after December 31, 2025. The Committee’s plan would not only make the deduction permanent but also expand its scope and generosity.
Key Changes Proposed:
- Permanent Extension: Prevents the deduction’s scheduled expiration at the end of 2025.
- Increased Deduction: Raises the deduction rate from 20% to 23% of qualified business income.
- Phaseout Reform: Smooths the phaseout for high-income taxpayers by reducing the deduction gradually—75 cents for every dollar of taxable income above the threshold—mitigating the so-called “rate cliffs” in current law.
- Expanded Eligibility: Allows income from business development companies to qualify for the deduction.
These changes significantly increase the fiscal cost of the deduction. According to the Joint Committee on Taxation, the proposed expansion and permanent extension of Section 199A would cost $704.7 billion over the FY2025–FY2034 period. That figure exceeds earlier projections and reinforces longstanding concerns that the deduction’s benefits remain heavily tilted toward high-income earners.
Supporters argue that enhancing 199A will further help small businesses reinvest and grow. But the lack of clear evidence that the deduction has boosted real economic activity, combined with its substantial budgetary impact, raises serious questions about its long-term value to the broader economy or fairness in the tax code.
