A proposal to add an additional levy to litigation finance profits will need to be removed from the Republican tax and spending bill, the Senate’s referee said Monday.
The proposal would have added a tax on litigation finance proceeds of 31.8%, down from 40.8% in an earlier version of the bill proposed by Sen. Thom Tillis (R-NC). The Senate parliamentarian ruled the proposed tax was not compliant with the expedited procedure Republicans are using to pass the legislation, according to a person familiar with the matter.
Though lawmakers may still try to re-insert the provision, its failure to be included in the bill would be a huge relief for litigation funders. They warned the provision could destroy the growing business of financing litigation, in which capital providers pay fees in exchange for a slice of court winnings or settlement proceeds.
One analysis of the bill by law firm Schulte Roth & Zabel said the real tax rate for funders could reach as high as 65% when accounting for taxes paid when distributing earnings. That rate was determined before the bill’s tax rate was lowered to 31.8%.
“There is little precedent for the establishment of an entirely new income tax system dedicated to a particular industry,” the Schulte lawyers wrote.
Senate Parliamentarian Elizabeth MacDonough has been going through the massive reconciliation bill to ensure its provisions meet Senate budgeting rules. Under so-called Byrd challenges, lawmakers are able to argue that certain provisions have a negligible impact on the budget and must be removed.
Lawmakers have a chance to rewrite provisions that are struck down, so the litigation finance provision could be resurrected.
Tillis’ office said earlier that the plan would raise $3.5 billion in revenue over 10 years. That total, which came before the rate was cut, is a speck compared to the $3.8 trillion cost of extending President Donald Trump’s first-term tax cuts estimated by the Joint Committee on Taxation.
The $16.1 billion litigation finance industry, which typically provides funds for large scale litigation and loans to law firms, has said the bill could wipe out the sector. It’s been taking measures to push back, including courting senators and deploying lobbyists in a bid to remove the provision.
Funders pinned their hopes on the Byrd challenge process early on in.
The debate over the provision has split the Republican party, with members of its populist wing decrying the effort as a boon for large corporations who could evade lawsuits if plaintiffs couldn’t afford to pursue them. A range of companies, including Exxon Mobil Corp., Uber Technologies Inc. and some large insurers urged lawmakers to include the tax in the sweeping legislation.
Other lobbying groups, including the American Tort Reform Association, support the measure, saying it will increase balance and transparency in the industry.
The litigation funding industry is facing a growing wave of potential regulation, including new state laws forcing litigants to disclose outside financial backers. The effort to raise taxes on the industry represents a far more serious threat that could cause funders to redouble their lobbying efforts going forward.
— With reporting by Emily Siegel
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