Policy or Politics, Tax Break for Trial Lawyers a Loser

Here and there the American Association for Justice has tried to defend its claim for a $1.6 billion federal tax break by arguing that trial lawyers want to be treated just like any other business. One AAJ spokesperson made the claim in a recent interview with The Hill, but apparently refused to be identified. Talk about the courage of your convictions.

As issue is the attempt to deduct loans extended in support of contingency fee litigation as business expenses. Bills to accomplish that goal have died in Congress, so the trial lawyers quietly appealed to the U.S. Treasury for a special-interest tax intepretation.

But what about the point? Is it really just about fairness?

A Washington Times editorial this week refuted the claim. From “Pushback on trial-lawyer tax breaks“:

“The Treasury is looking to clarify a provision in the tax code that prohibits trial lawyers from deducting expenses for contingency cases in the year they are incurred,” according to The Hill. “Instead, these expenses can only be deducted after the case has concluded. The [lawyers] seek to make it so trial lawyers can deduct these expense in the year they are paid. … Currently, expenses incurred by trial lawyers for contingency cases are considered to be loans that the client will eventually repay.”

Victor Schwartz, author of a prominent textbook on tort law and a leading opponent of jackpot-justice lawsuits, has estimated for about 25 years without contradiction that plaintiffs’ lawyers win at least some money by judgment or settlement from some 95 percent of their cases. In other words, these are loans for which repayment is quite likely. As the Heritage Foundation’s Jack Park explains, “When a carmaker or dealer, [or] a furniture company … makes a loan to the buyer by selling over time, those loans are part of a related business, not a deductible business expense. In fact, those loans generally do not become deductible unless and until there is a default. Why shouldn’t the trial lawyers wait until there is a default to deduct their loans like everyone else?”

The difference is important because if the lawyers get the tax subsidy, the Treasury will be floating the lawyers’ interest costs.

The Times noted the July 22 letter to Treasury from the ranking Republicans on the tax-writing committees, Sen. Grassley of Senate Finance and Rep. Dave Camp of House Ways and Mean, that made a clear case that the tax break was not justified and would circumvent the policymaking branch of government, Congress.

Twenty-four Senate Republicans added their opposition in a letter Thursday to Treasury Secretary Geithner on Thursday, recognizing — we assume — how politically repellant this kind of lawsuit-subsidizing, special interest tax break would be to most Americans. From the letter organized by Sen. John Thune (R-SD):

As you may know, a number of recent reports have suggested that the Treasury Department is considering a policy change that would allow trial lawyers to deduct expenses and court costs in the year in which they were incurred. We have serious concerns about this proposal which could add $1.6 billion to our already exploding national debt. We believe that this targeted tax break will do nothing to spur economic growth or job creation. Instead, it would only further provide incentives for contingency fee lawsuits which raise prices for consumers and decrease employment.

We are also very concerned that this proposal may be moving through without any scrutiny. Bills which would have a similar effect have been introduced in both the U.S. House of Representatives and the U.S. Senate. However, neither the Ways and Means Committee nor the Finance Committee has held a hearing on these bills due to the significant opposition that they face. Additionally, this proposal was not mentioned in the Treasury’s Department’s annual “Green Book.”

Hat tip: Y’All Politics, “Senators Roger Wicker and Thad Cochran pen letter to Geithner over trial lawyer tax breaks.” See also Jack Park, Heritage Foundation, “Tax Break for the Trial Lawyers: A Bad Idea

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