What Happened?

A proposal to raise a key tax break for small business owners and self-employed workers could cost taxpayers between $69.3 billion and $199 billion over the next decade, according to a new report from the Congressional Research Service (CRS). [](#ngr-1b80673f-30c2-4ccb-b834-c51b1945b17c)

The break in question is the Section 199A pass-through deduction, which lets business owners who file taxes as individuals, rather than corporations, deduct a share of their business income from what they owe. The proposal would raise that deduction from 20 percent to 25 percent.

The deduction was made permanent and expanded under the 2025 reconciliation law. A further increase to 25 percent has not yet been voted on.

Why Does it Matter to Me?

About 26.6 million Americans claimed the deduction in 2023, up from 18.7 million in 2018. If you own a small business, work as a freelancer, or run a side operation and file taxes as an individual, this deduction likely applies to you.

Most claimants, about three in four, earn under $200,000 a year, though they account for only about one in four dollars of the total deduction claimed. Taxpayers in that income range average a $2,790 deduction per claim.

Taxpayers earning $5 million or more average $724,162 per claim, and that group, just 0.2 percent of all claimants, captures 22 percent of the total deduction amount.

Both Sides, Now

Supporters of raising the deduction argue it levels the playing field between small business owners and large corporations. The deduction was created in 2018 partly to address a tax gap: without it, pass-through business income could face a top rate of 37 percent, while corporations pay a flat 21 percent rate. At the current 20 percent deduction, the top effective rate on pass-through income is 29.6 percent.

Critics point to a study cited in the CRS report that found "little evidence of changes in real economic activity as measured by physical investment, wages to non-owners, or employment." The CRS report attributes that result partly to a design that lets firms claim the benefit without expanding investment, hiring, or raising wages.

The chair of the House Ways and Means Committee reportedly expressed interest in raising the deduction to 25 percent during deliberations over the 2025 reconciliation law, which already made the deduction permanent and widened who qualifies for it.

What Happens Next?

Any increase to 25 percent would add to the $736.5 billion in revenue reductions the Joint Committee on Taxation (JCT) already attributes to the 2025 reconciliation law. How lawmakers resolve that uncertainty will shape the next round of budget reconciliation math, the CRS report found.

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