The tax break that even fiscal hawks don't want to end
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Quick Fix
As Senate fiscal hawks prepare to blow up the House GOP's 'big beautiful bill' for fueling the deficit, there's one item they won't touch: a politically popular business tax deduction that has been widely criticized for lacking broad economic benefit.
The deduction for qualified 'pass-through' business income, which is not subject to corporate taxes but instead individual income tax, was included in the 2017 Tax Cuts and Jobs Act. The vast majority of businesses in the U.S. are pass-through entities — sole proprietorships, partnerships, and LLCs among others — and it's estimated that 43 percent of the workforce was employed by them, as of 2021.
The House megabill would slightly increase the so-called Section 199a deduction, which is set to expire at the end of the year, and make it permanent. But doing so would amount to a fairly significant government revenue hit –– almost $820 billion over 10 years, according to the congressional Joint Committee on Taxation.
The resistance to ending the deduction illustrates how difficult it will be to scale back the megabill while negotiations take place over the 1,000-page reconciliation package, even for an item that critics say offers few economic gains.
Tax policy experts and economists argue that the program primarily rewards the wealthiest business owners. But even for the most fiscally minded Republicans, the political stakes are too high to consider a world without the deduction.
Sen. Ron Johnson (R-Wis.), one of the Senate's most vocal critics of the House GOP megabill, said he's not concerned about the federal revenue decrease the deduction is estimated to cause.
'I've said repeatedly I would just extend current tax law, because had we been smart enough back in 2017 to use current policy, none of this would have expired already, and we need to return that kind of certainty,' said Johnson, who pushed for the deduction in the original TCJA.
Sen. Rand Paul of Kentucky, another Republican who has been critical of the megabill, said he still supports the small business deduction. And Sen. Mike Rounds (R-S.D.) said the deduction 'is a very important part of the bill' that he believes will be included when it's passed and would be part of 'a major win.'
The House bill would allow individuals, trusts and estates to deduct up to 23 percent of qualified business income from taxable income, up from the current 20 percent threshold. Tax policy experts said they expect Congress to make the measure permanent but were surprised at the increase in the deduction.
The White House is also backing it. And the small business lobby is confident the deduction will be enshrined in a final reconciliation bill.
Even with overwhelming political support, critics across the small business and economic policy universe say the provision is costly, susceptible to tax avoidance, and won't stimulate the economy.
'Frankly, to me, it sort of just seems like an extra tax break for certain types of taxpayers that doesn't seem particularly warranted from a policy perspective,' said Miles Johnson, a senior attorney adviser at the Tax Law Center at NYU Law.
Samantha Jacoby, the deputy director of federal tax policy at the nonpartisan Center on Budget and Policy Priorities, said there aren't any advantages to increasing and making permanent the pass-through deduction. The policy has 'created a big wedge' between business owners and employees who are now paying a higher tax rate than their employers.
'Despite being almost universally panned by economists and other tax policy experts,' the influence of politically powerful businesses located in every district is part of the reason the provision is popular and pervasive among Republicans, Jacoby said.
Economic growth is one of the main arguments for proponents of the deduction, but policy experts disagree. Economists say there's a lack of evidence from the original deduction that there was any boost to real economic activity or employment that came from the pass-through business rate cut.
'I would categorize 199A as a business tax cut that is not pro-growth,' said Kyle Pomerleau, a federal tax policy senior fellow at the American Enterprise Institute. 'It is a policy that I think generally loses a lot of revenue for no good reason.'
IT'S THURSDAY — Any small business, insurance or financial services tips please send to your MM host at khapgood@politico.com. And, as always, send your tips, suggestions and personnel moves to Sam at ssutton@politico.com.
Driving the day
The SEC's Investment Management Division hosts a conference on 'Emerging Trends in Asset Management' with speakers including Commissioner Hester Peirce beginning at 9 a.m. … The SEC meets at 10 a.m. … House Small Business holds a hearing on 'How Private Equity Empowers Main Street' at 10 a.m. … House Financial Services holds a hearing on data privacy at 10 a.m. … Fed Governor Adriana Kugler speaks at the Economic Club of New York at noon.. The Urban Institute holds a virtual discussion on 'rent reporting as a pathway to credit building' at 12:30 p.m. … The Peterson Institute for International Economics holds a virtual discussion on industrial policy for Asia and the Pacific at 5 p.m. …
In The Economy
First in MM: New research from the Committee on Capital Markets Regulation, which has members in the finance, business, law, accounting and academic worlds, found no effect on consumer prices across sectors from having competing firms with common investors. The study looked at 52 industries, representing the majority of GDP, over a 24-year period (2000-2023), per our Victoria Guida.
The finding comes as some Republican state attorneys general are alleging in a lawsuit that Vanguard, BlackRock and State Street have violated antitrust laws by colluding to reduce coal production.
The market's mixed — Bonds rallied and stocks finished mixed after weak economic data boosted investors' confidence that the Federal Reserve will cut interest rates in the coming months. Services activity unexpectedly contracted in May, according to the Institute for Supply Management purchasing managers index, while ADP data showed 37,000 jobs were created, the slowest pace of private-sector hiring in more than two years, the Wall Street Journal reports.
Department of Labor staffing shortage raises CPI concerns — Some economists are beginning to question the accuracy of recent U.S. inflation data after the federal government said staffing shortages hampered its ability to conduct a massive monthly survey, the Journal reports.
What small businesses are saying — As the Senate mulls changes to the 'big, beautiful bill,' small businesses are raising red flags about the uncertainty pertaining to both taxes and trade. More than 90 percent said that certainty and predictability in the federal tax code are important to their financial planning, according to the latest Goldman Sachs 10,000 Small Businesses Voices survey. More than 35 percent said they were feeling negative effects from tariffs and another 38 percent said they expect to feel the effects of those policies in the future. Fifty-one percent said they would be unable to take out a loan at current interest rates.
TRADE CORNER
More Carney-Trump negotiations on steel and aluminum — Ontario Premier Doug Ford is urging Canada's prime minister to retaliate against the United States after it doubled tariffs on steel and aluminum imports. But Prime Minister Mark Carney is holding off, arguing that he's close to striking a new trade deal with President Donald Trump, Mickey Djuric reports.
On The Hill
Senate Banking's planned megabill cuts — Senate Banking Committee Republicans are preparing to propose provisions that would change Federal Reserve employees' pay scale and zero out the Consumer Financial Protection Bureau's funding as part of the Senate version of the GOP megabill, according to a committee staff memo obtained by POLITICO, Jasper Goodman reports.
The big, beautiful national debt — Trump is pursuing an agenda that would add trillions of dollars to the soaring national debt, ignoring warnings from Wall Street, Republican deficit hawks and his outgoing cost-cutting champion, The Post reports.
CRYPTO CORNER
JP Morgan to take crypto as collateral — JPMorgan Chase & Co. plans to let trading and wealth management clients use some cryptocurrency-linked assets as collateral for loans, a major step by the largest U.S. bank to make inroads into an industry that Trump has pledged to support, Bloomberg reports.
Pro-crypto dems look to delay market structure markup — House Financial Services Democrats who are open to backing GOP-led cryptocurrency legislation are pressing committee Chair French Hill (R-Ark.) to delay a vote on his sweeping market structure bill, saying they need more time to negotiate changes, Jasper reports.
At the regulators
SEC opens the door — The SEC is weighing an overhaul to decades-old rules outlining what types of foreign companies trading in the U.S. should be subject to a lighter-touch reporting regime, our Declan Harty reports.
Fed's top bank cop gets confirmed — The Senate on Wednesday confirmed Trump's pick to serve as the Fed's top official overseeing banks, installing a key regulator who is poised to advance the administration's financial deregulatory agenda, per Michael Stratford.
Senators voted 48-46, along party lines, to confirm Fed Gov. Michelle Bowman as the central bank's vice chair for supervision.
Atkins eyes long-time trading executive for SEC — Chair Paul Atkins is eyeing Jamie Selway, a former Wall Street executive who has advised cryptocurrency firms, to lead his trading and markets division, according to two people familiar with the matter who were granted anonymity to discuss the still-private deliberations, Declan reports.
The AIC's private credit pitch — The American Investment Council released a new report by EY that estimates private credit investments have supported companies with more than 811,000 employees — more than 200,000 of whom are in the manufacturing sector.
Jobs report
Rustin Finkler joined Early Warning Services as a director for public affairs communications this week. Prior to joining EWS, Rustin was a managing director at Vision360 Partners, a public relations firm, where he worked on public affairs and communication plans for clients like the Consumer Bankers Association. He is also a Penta Group alum.
Kari Heerman will join the Brookings Institution's economic studies program as a senior fellow and director of trade and economic statecraft on Aug. 11. Heerman, who was previously acting chief economist at the State Department, will lead a new effort to expand and coordinate cross-program work already being done at Brookings.
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