20 stories for 20 years: Championing tax reform for Main Street businesses

Perhaps the most misunderstood policy area in Small Business Majority’s portfolio is taxes. This is true for two reasons. First, taxes are really complicated and many small business owners rely on accountants so they don’t have a complete picture of what they pay in taxes or why. But tax policy is also a source of confusion because most people think that almost any business tax cut has to be good for small businesses. The reality, however, is more nuanced. 

One of the consistent findings from Small Business Majority’s polling over the years is that small business owners view the tax code as skewed in favor of large corporations and that entrepreneurs overwhelmingly agree big businesses don’t pay their fair share of taxes. And yet, many in Congress tend to ignore or misunderstand these realities when they think about changes to our tax system. 

When policymakers seized on an opportunity in 2017 to overhaul the federal tax code for the first time in decades, they immediately latched onto proposals that would do little to help the smallest Main Street businesses. Much of the debate surrounding what became the Tax Cuts and Jobs Act (TCJA) involved the creation of a new tax deduction under Section 199A of the federal tax code, which would allow pass-through entities to deduct up to 20% of their qualifying business income. This was significant because 95% of small businesses are pass-through entities, meaning that almost all small business owners declare their business income as part of their personal tax return. Although it might sound great that so many small businesses could deduct up to 20% of their income, the reality was very different – only the highest-earning companies would actually receive substantial benefit from 199A while true Main Street businesses would see almost no reduction in their tax obligations.

Throughout the second half of 2017, Small Business Majority and our network mobilized against the TCJA. This included a media blitz in which entrepreneurs like Maryland small business owner Mike Brey placed op-eds in news outlets like The Hill, noting “that small businesses don’t want or need tax cuts in a vacuum. Instead, we want meaningful tax reform that will even the playing field for all businesses, large and small.” And Small Business Majority Founder & CEO John Arensmeyer appeared on FOX Business several times to make the point that lawmakers should be acting in the best interests of true small businesses. Despite our best efforts, TCJA ultimately passed with the 20% pass-through deduction under Section 199A. But that wasn’t the end of the story. 

Many of TCJA’s provisions were designed to expire in 2025, forcing Congress to once again debate tax policies that would impact small businesses. Yet again, congressional leadership lined up behind Section 199A, claiming that it had offered significant benefits for small businesses since 2017. This time, however, available data proved otherwise: 74% of the Section 199A pass-through tax deduction benefit has flowed to the wealthiest 5% of businesses. And while the highest earning pass-through entities claimed an average deduction of over $1 million in 2021 due to Section 199A, pass-throughs with adjusted gross incomes below $100,000 took home an average deduction of just $1,997.

With the facts on our side, Small Business Majority offered an alternate proposal, asking Congress to reimagine Section 199A and overhaul it to allow pass-through entities to deduct the first $25,000 in qualified business income from their annual tax obligations. The change would benefit small business owners with adjusted gross incomes less than $400,000 for joint filers and less than $200,000 for single filers. The overwhelming majority of pass-through entities fall below these income levels. This proposed change had strong support from small business owners, with 74% in favor. Among them was Brittney Patterson, office manager for 2 J’s & Sons in Noel, Mo., and wife of business owner Jeffrey Patterson.

U.S. Sen. Ben Ray Lujan (N.M.) and U.S. Rep. Gwen Moore (Wisc.) worked closely with Small Business Majority to introduce legislation that would have codified this change; although it came up for a vote in both the U.S. House of Representatives and the U.S. Senate, it did not ultimately pass. 

We know that taxes are never a settled issue in the United States, and we’re not giving up. Whenever another opportunity arises to offer our $25,000 deduction proposal for pass-through entities, we will be there to get it introduced. Because real tax reform for small businesses doesn’t come from any old tax break. It comes when we prioritize the smallest businesses and ensure that they receive the most benefits.