Why It Matters

Raising the Section 199A pass-through deduction from 20 percent to 25 percent would carry a federal revenue cost estimated between $69.3 billion and $199 billion over 2026–2035, depending on the model used, according to a new Congressional Research Service (CRS) report.

That range sits on top of the $736.5 billion in revenue reductions the Joint Committee on Taxation (JCT) already attributes to the 2025 reconciliation law, P.L. 119-21, which made the deduction permanent and widened its eligibility limits.

Taxpayers with adjusted gross income (AGI) under $200,000 represent 74.7 percent of claimants but account for only 25.8 percent of the total deduction amount, averaging $2,790 per claim. Those with AGI of $5 million and above represent just 0.2 percent of claimants but capture 22.0 percent of the total, averaging $724,162 per claim.

The Big Picture

The deduction was first created by P.L. 115-97, the 2018 reconciliation law, which cut the corporate rate from 35 percent to 21 percent and capped the top individual rate at 37 percent. The 199A deduction was designed to address a tax parity concern: without it, pass-through income could face a top statutory rate of 37 percent, while C corporation profits face a flat 21 percent rate.

At the current 20 percent deduction rate, the maximum effective marginal rate on pass-through income is 29.6 percent. The CRS report estimates that raising the deduction to 25 percent would reduce the marginal effective tax rate on new pass-through investment from 17.0 percent to 16.1 percent, narrowing the gap with corporate investment tax rates by 0.9 percentage points.

The report notes that 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.

According to Internal Revenue Service data cited in the report, claims rose from 18.7 million in 2018 to 26.6 million in 2023, with total claimed amounts climbing from $150.0 billion to $214.6 billion over that period.

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

The Bottom Line

The wide modeling gap between the $69.3 billion and $199 billion revenue-cost estimates reflects acknowledged data limitations at the business level. With the Joint Committee on Taxation's $736.5 billion baseline already on the books, how lawmakers resolve that uncertainty will shape the next round of budget reconciliation math.

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