It’s a classic sci-fi trope: a small, relatively harmless creature seems adorable at first, but then metastasizes out of control and starts gobbling up everything in sight. Like the blood-sucking plant Audrey in Little Shop of Horrors, or the cute little creature that becomes the titular troublemaker in Gremlins, or the kittycat in The Marvels that turns out to be an alien that can swallow people.
There are tax breaks just like that. Even those that are borne of good intentions can eat up far greater amounts of revenue from state and federal governments than was originally intended, lining the pockets of very wealthy people and shifting the responsibility for paying taxes onto everybody else.
One increasingly costly tax break for the rich that’s getting more attention is called QSBS. The full name of this tax break is so misleading that I don’t want to name it (you can look it up here), but the Tax Foundation, a conservative, pro-business organization, calls it “Quite the Skewed Business Subsidy,” and that’s an understatement.
Simply put, QSBS allows millionaire investors to pay zero income tax on their profits. It’s been best known as a tax avoidance strategy for Silicon Valley companies like Uber, Zoom, and DoorDash, but Bloomberg News reports that the tax break has become so lucrative – especially after its expansion in the 2025 Trump tax law – that clever tax lawyers are teaching lots of other kinds of businesses how to exploit it, too.
To be clear, this is not about promoting a strong economy. There is no evidence that QSBS does so, and there is plenty of reason to think that it doesn’t. Mostly it just makes money for wealthy investors and the tax lawyers who charge them huge fees to take advantage of the complex tax break.
And it is costing states billions of dollars in lost revenue, because most allow this federal tax break to weaken their state income taxes as well. We estimate that by 2032, QSBS will be costing states $1.1 billion a year, and since states must balance their budgets, that’s money they can’t use for public services. That $1.1 billion, for example, is enough to pay the annual salaries of more than 14,000 teachers.
Figure 1
The good news is that state policymakers who would rather spend money on schools, roads, healthcare, and other public services than useless business subsidies can enact a simple change to their tax codes to “decouple.” Maine and Oregon did so earlier this year, and now Illinois, Vermont, and likely Rhode Island are also decoupling from QSBS.
In some sci-fi movies, humanity prevails. In others, it’s the monster. Who will win in your state?
