Biden’s first budget retains tax break for Trump-era businesses
WASHINGTON – Owners of tightly owned businesses would still benefit from a 20% tax deduction under President Biden’s tax plan, leaving high-income people who run construction and manufacturing businesses to benefit – for the moment – of a provision that Republicans created in 2017 against the Democratic opposition.
Administration officials haven’t explained why they haven’t offered to curb the break at this point, and the White House has not commented. Treasury officials said on Friday that some campaign proposals require more work and others may appear in future plans.
The deduction “just seems to be a bit without redeeming the qualities and frankly I was a little surprised that the Biden administration didn’t offer to reduce it,” said William Gale, senior researcher at the Brookings Institution, a Washington from the left. Tank.
Kevin Kuhlman, vice president of government relations at the National Federation of Independent Business, said he was preparing for the removal of the deduction.
“There is a sensitivity to direct small business tax increases and I think that’s one of the reasons that may not have been included,” he said.
He and other supporters of the provision say Congressional Democrats’ distrust of some of Biden’s tax hike proposals could lead them to seek to change this hiatus as a potential alternative way to raise funds.
“This is where you fear it will resurrect, especially when you consider the pressure on the income they are going to take,” said Dustin Stamper, head of the tax law affairs practice at the accounting firm Grant Thornton LLP.
Senator Ron Wyden (D., Ore.), Chairman of the Senate Finance Committee, is working on a series of changes to the break that could severely dampen it for wealthier households while opening it up to the upper middle class. service business owners.
“I’m looking for ways to rearrange the deduction to make sure it’s not just a top giveaway,” Wyden said. “The benefit could be made more generous to middle-class small business owners while generating income for other priorities like child care.”
Congress created the tax break – Section 199A of the Tax Code – in the 2017 tax law that was passed by Congress without a single Democratic vote. It gives a 20% deduction from income – essentially a 20% rate reduction – to business income that appears on personal income tax returns. This includes the income of partnerships, sole proprietorships, and S corporations, all of which are known as mid-size businesses because their income is transferred to their owners without the separate corporate-level taxes that typically apply. to companies.
The idea behind this provision was twofold: to create rough parity with corporate taxes also falling, and to provide a break for millions of businesses across the country, as part of a political compromise that satisfied lawmakers like as Sen. Ron Johnson (R., Wis.) and Steve Daines (R., Mont.) who wanted to ensure that tightly owned companies benefit. The deduction saves taxpayers $ 46 billion this year, according to the Congressional Joint Committee on Taxation.
The breakup comes with certain limits for high-income households, defined as individuals with taxable income over $ 164,900 or married couples with income over $ 329,800 this year. In these income groups, service businesses such as law firms and medical practices are not eligible, the idea being that their income is more akin to a salary than to owning a business.
Other companies can only qualify if they have significant employees or assets, so the break tends to benefit the real estate, manufacturing and construction sectors.
Democrats say the break is an unnecessary boon to the rich. About half of the profits go to households earning more than $ 1 million, according to the Joint Committee on Taxation. A study by two career economists from the Treasury Department and two other academics found that – at least in its first year – the deduction caused no noticeable change in economic activity and little tax evasion that some had. feared.
“What’s bad is… how can I count manners?” Said Mr. Gale. “Fairness, incentive structure, complexity are probably the three bad things. And then there is the lack of good things.
During the 2020 campaign, Mr. Biden proposed phasing out the hiatus for business owners with incomes above $ 400,000. As president, when he released his plans for infrastructure and family spending, he detailed billions of dollars in tax increases, including some that were not in his campaign proposals. This provision has not been affected.
The administration relies on corporate tax increases to fund the infrastructure plan and on personal capital gains tax increases and ordinary income tax increases to pay for family and education expenses. While some of these changes would mean significant tax increases for many mid-size businesses, they would retain the 20% deduction.
Some Democrats argue the break is being kept as is. Representatives Josh Gottheimer (D., NJ) and Henry Cuellar (D., Texas) co-sponsored a bill to make the split permanent, and with weak Democratic majorities, any division can be difficult.
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The repeal may also not generate much money over the 10-year budget window. Like other elements of the 2017 tax law, the deduction is expected to expire at the end of 2025. Thus, repealing or reducing the break would only bring in funds for a few years.
Mr Wyden’s approach probably wouldn’t generate as much money as the Biden campaign proposal. Indeed, if it could phase out the break for households earning over $ 400,000, it would also make it more generous for some business owners below that level. He plans to remove restrictions on the break that start at $ 164,900 for individuals and $ 329,800 for married couples – a move that could benefit service business owners in that income bracket, such as lawyers and lawyers. accountants.
Write to Richard Rubin at [email protected]
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