This week, the Senate’s top tax writer, Finance Committee Chairman Ron Wyden (D-OR), introduced the Small Business Tax Fairness Act, which would significantly limit the existing 20% deduction for manufacturers organized as “pass-through” entities.
The background: The 2017 tax reform law created a 20% deduction for business income earned through pass-through entities such as S-corporations or partnerships. The lower tax burden provides manufacturers with additional capital to hire workers, increase wages and expand operations.
- The Small Business Tax Fairness Act, however, would essentially eliminate the pass-through deduction for all but the very smallest of companies by phasing out the deduction for taxpayers with income above $400,000 – completely eliminating it as income reaches $500,000.
- Moreover, the bill would negatively impact family-owned businesses by denying the deduction for business held in trusts and estates.
The NAM’s view: As the vast majority of manufacturers are small and organized as pass-through entities, phasing out the deduction as proposed under the bill would ultimately hurt the men and women who make things in America.
- The current-law provision links wages with the deduction: the more you pay your workers, the larger the benefit for the manufacturer. The proposal does away with this formula, which would break the important link between wages and the deduction.
- Earlier this year, the NAM released a major tax study on the effects of proposed tax increases, including a repeal of the pass-through deduction. That study found that one million jobs would be lost in just the first two years if those increases were to be implemented.
The last word: “This pass-through deduction is a critical pro-growth tool enabling manufacturers to hire more workers and grow their operations,” said NAM’s Senior Director of Tax Policy David Eiselsberg. “Make no mistake, this legislation would amount to a major tax increase and effectively punish manufacturers that are doing the right thing by hiring workers and paying good wages with a higher tax bill.”