In Reconciliation Package, House of Representatives Missed an Opportunity to Help the Smallest Businesses

“When the U.S. House of Representatives decided to advance legislation that would reduce funding for Medicaid, change Affordable Care Act (ACA) enrollment requirements and keep Section 199A effectively unchanged, lawmakers not only missed out on what could be their last chance for many years to help America’s small businesses through meaningful policy reforms, they also made things worse for many small firms. 

We’re alarmed by the fact that the House’s reconciliation package would cut funding for Medicaid and implement stricter eligibility and income verification processes for ACA Marketplace enrollment. If this legislation becomes law, when combined with the expiration of premium tax credits that help make coverage purchased through the ACA Marketplace more affordable, the Congressional Budget Office estimated previously that nearly 14 million people would lose their health insurance as a result. Our research found that 57% of small business owners oppose cuts to Medicaid while only 23% would support cuts. This is not a surprise given the volume of small businesses that rely on Medicaid. In fact, U.S. Census data revealed that more than 7 million small business owners and employees depend on Medicaid for affordable healthcare coverage. When states expanded Medicaid eligibility between 2013 and 2022, Medicaid coverage increased by 2.5 million for employees of small businesses and 1.3 million among self-employed workers. Additionally, the uninsured rate of small business employees and self-employed individuals dropped to record lows in 2022 thanks in part to premium tax credit improvements and the expansion of Medicaid. As for the ACA Marketplace, more than half of all enrollees are small business owners, self-employed entrepreneurs or small business employees. What’s more, the ACA contributed to the number of uninsured self-employed entrepreneurs falling by 1.3 million between 2013 and 2022.

When it comes to Section 199A, the available data clearly shows that it is a failed tax policy when it comes to benefitting the vast majority of small businesses. The 2017 Tax Cuts and Jobs Act (TCJA) created a 20% deduction for pass-through income under Section 199A. Congress is  now deciding the fate of that deduction. Although many lawmakers claimed that the TCJA would help average Americans, 74% of the current Section 199A pass-through tax deduction benefit flows to the wealthiest 5% of businesses. 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. That’s why the majority of small businesses support legislation like U.S. Rep. Gwen Moore’s (Wisc.-04) Mom and Pop Tax Relief Act, which would reform Section 199A to permit pass-through entities to deduct the first $25,000 in qualified business income from their annual tax obligations. Yet, despite all of the evidence that Section 199A in its current form is ineffective, the just-passed House reconciliation legislation would actually increase the deduction to 23%. This change ignores the shortcomings of 199A entirely, and may further skew benefits toward the wealthiest pass-through businesses. 

As the reconciliation package moves on for consideration in the U.S. Senate, we strongly urge senators to correct course and provide substantive changes to the bill that protect small businesses and their employees from losing key health benefits. We also encourage the upper chamber to take a long, hard look at the facts on Section 199A before moving forward with a tax change that adds to the deficit and fails to provide substantial tax savings to the smallest businesses that need the most support. If no edits are made to the current legislative package, Congress will have failed to support America’s job creators.”