Democrats have tucked a lucrative $2.5 billion tax break inside President Biden’s multitrillion-dollar social welfare bill that would benefit the trial lawyers lobby, spurring Republican accusations of political backscratching.
The tax break allows trial lawyers working on a contingency basis, meaning they are paid only if a case is settled in their favor, to deduct expenses immediately. Such expenses include hourly labor fees and the expenses associated with waging a lawsuit, such as filing and deposition costs.
On average, according to the American Bar Association, the fixed rate for contingency cases is anywhere between 33% and 40% of the total settlement payout. In some instances, the contingency fee can range upward of 50%.
Given that legal costs have soared in recent years, the Joint Committee on Taxation estimates the write-off would cost taxpayers $2.5 billion over the next decade.
Republican lawmakers argue the lucrative write-off is nothing more than a giveaway to the trial lawyers lobby, which heavily underwrote Mr. Biden’s presidential bid.
Donors from the legal sector gave more than $274 million to Democrats in 2020, according to the Center for Responsive Politics.
“Trial lawyers donated tens of millions to Joe Biden’s campaign,” said Sen. Tom Cotton, Arkansas Republican. “And now, Biden’s reckless spending plan includes a $2.5 billion tax break for trial lawyers, what a coincidence.”
Under the current tax code, trial lawyers are barred from writing off such expenses until the case is resolved. Mr. Biden’s social welfare bill, which passed the House along party lines last week, would upend the status quo.
Not only would trial lawyers be able to deduct expenses from contingency cases immediately, but they also would be allowed to do so even if there is the “possibility that such amount[s] will be repaid” after trial.
What’s more, Mr. Biden’s bill stipulates that income trial lawyers derive from contingency cases “shall not be reduced” by the write-off.
Currently, the IRS treats contingency expenses as nondeductible loans because of the likelihood they would be repaid if a case is won. In instances where a case is lost, the IRS allows trial lawyers to write off the expenses like a bad loan.
The American Association for Justice, the top lobbying organization for trial lawyers, argues the write-off is needed because it may take years for cases to be settled.
“Lawyers working on a contingency fee basis cannot deduct their expenses until the case resolves, which can be years after the expense is incurred,” said Carly Moore Sfregola, a spokeswoman for the association. “Contingency fee arrangements are the only way that regular people can afford to seek justice.”
The association, which has pushed for the deduction since the early 2000s, raised and spent more than $2.2 million to elect Democrats in 2020. Overall, 97% of its donations went to left-leaning candidates and causes.
Of that sum, nearly $67,000 went directly to Mr. Biden’s campaign and a super PAC supporting his candidacy.
The White House did not return requests for comment on this article.
House Ways and Means Chairman Richard Neal, a Massachusetts Democrat responsible for the tax proposals in Mr. Biden’s social welfare bill, also did not respond to a request for comment.
Business groups warn that if the deduction goes into effect, it would wreak havoc on the economy and small businesses. They argue that the broad nature of the write-off would only serve to encourage frivolous lawsuits since trial lawyers would be eligible for it regardless if a case succeeds.
“American businesses have spent almost two years facing a pandemic and worker and supply shortages, and now they face the possibility of government-subsidized lawsuits,” the U.S. Chamber of Commerce said in a statement. “Congress must not pass this ‘tax break for trial lawyers’ and instead provide businesses across our nation a chance to recover.”
Rep. Kevin Brady of Texas, the top Republican on the House Ways and Committee, summed up the impact of the deduction in simpler terms.
“Expect more speculative lawsuits,” Mr. Brady said. “Less job creation.”