Senate Reconciliation Package Fails Small Businesses

“The U.S. Senate’s version of the ‘Big, Beautiful Bill’ is a mix of disappointments, missed opportunities and outright concerns for small businesses. From making healthcare more expensive for small business owners and their employees to making permanent a supposed small business tax deduction that actually does almost nothing to create savings for small firms, there isn’t much here that would help entrepreneurs succeed. And along with those shortcomings, we are concerned that the Senate version will drive up the debt even more than the proposal from the U.S. House of Representatives.

First, and most worrying, is the fact that the Senate version of this legislation goes even further than the House of Representatives did when it comes to cutting Medicaid benefits. For example: Starting in 2027, the provider tax allowable for Medicaid expansion states would be incrementally lowered from the current 6% until it hits 3.5% in 2031. (The House bill only prevents states from raising their provider tax beyond the current 6 percent.)

In addition to Medicaid cuts, the Senate proposal allows for the expiration of enhanced premium tax credits (PTCs) that have helped make healthcare more affordable for those who purchase plans through the Affordable Care Act (ACA) Marketplace. Small business owners have told us that these credits make healthcare considerably more accessible to them. In fact, nearly three-quarters (74%) of small businesses favor extending the credits rather than letting them expire, according to Small Business Majority's research. Without the availability of those credits, many entrepreneurs may not be able to continue as small business owners because they will need to work for someone else in order to obtain health insurance. 

When combined with the expiration of enhanced PTCs, the Congressional Budget Office estimated previously that nearly 14 million people would lose their health insurance as a result of slashing Medicaid. 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. In fact, nearly half of working Medicaid recipients in 2023 were employed at small businesses with fewer than 50 employees. 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.

Second, the Senate proposal to make permanent the current 20% deduction for pass-through entities under Section 199A is just the latest example of lawmakers failing to restructure the tax code in a way that benefits our nation’s smallest firms. And while the newly proposed $400 minimum deduction for pass-through entities with at least $1,000 in qualified business income is a good start, it doesn’t go far enough to deliver meaningful benefits for Main Street. Although many lawmakers have claimed that the 2017 Tax Cuts and Jobs Act would help average Americans, 74% of the current Section 199A pass-through tax deduction benefit flows 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. 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. 

Given that the Senate and the House will have to resolve their differences before the ‘Big, Beautiful Bill’ becomes law, we strongly urge congressional leadership to rethink its approach to the existing legislative proposal that would make it even harder for the smallest businesses to get ahead. This includes protecting access to health insurance and boosting the bottom line of more small firms through meaningful tax reform. If these changes are not made, we risk losing an entire generation of small businesses mainly because Congress decided to further enrich the wealthiest firms in exchange for trillions more in debt.”