Trial Bar Benefits From Tax Bill

Posted May 21, 2008 at 6:34pm

House Republicans, business lobbyists and tort reformers launched a last-ditch effort Wednesday to scrap a tiny provision involving trial lawyer taxes from a much larger bill that would extend many popular tax credits backed by K Street.

Opponents say the measure, which would change the period during which lawyers could file their trial expenses for a business tax deduction, is a tax break for the trial bar that will cost more than $1.5 billion over 10 years.

But Democrats and the trial lawyer’s main lobby, the American Association for Justice, say the proposal is no more than a minor change that would put law partnerships on a level playing field with other businesses.

The tax extenders package passed the House on Wednesday afternoon, 263-160.

The fight, however, will continue as the bill moves to the Senate.

The White House also has issued a veto threat because of several other provisions in the bill, including the trial lawyer measure.

“I think ultimately it will be dropped,” said Rep. Kevin Brady (R-Texas), who voted against the extender package for multiple reasons, including the trial lawyer measure and the fact that it did not include a patch to the alternative minimum tax.

“I don’t believe the president’s going to support a last-minute special interest tax break,” he said.

Larry Akey, a spokesman for the Institute for Legal Reform, said his group would fight the provision, while its affiliated organization, the U.S. Chamber of Commerce, dispatched a letter that included criticism of the trial lawyer tax change.

“We are frankly appalled that in the current economic conditions that a bunch of wealthy trial lawyers would ask taxpayers to help them fund their frivolous lawsuits,” Akey said.

“Obviously the trial bar is counting on the notion that there are a number of good tax provision extensions in this particular piece of legislation and so are trying to slip by an entirely new tax break for themselves,” Akey said.

And a source at the Republican Conference quoted House Minority Whip Roy Blunt (R-Mo.) as saying that he had to give Democrats credit for knowing how to “unabashedly reward their friends.”

A Democratic staffer familiar with the proposal, however, said Republicans and tort reformers were overreacting.

The tax change, the staffer said, “is a technical fix to provide equity to allow lawyers to deduct their expenses regardless of the type of contingency arrangement.”

Under current law, lawyers who work on a pure contingency fee arrangement — taking a flat cut 30 percent to 40 percent of a judgment, with nothing extra for expenses — are able to deduct their expenses as they occur.

Attorneys who work under a modified contingency fee arrangement — in which they are paid a flat percentage as well expenses — are permitted to deduct their expenses only after the case is resolved, Hill sources said.

Rep. Michael Arcuri (D-N.Y.) took to the House floor to defend the proposal.

“Some people in this institution tend to talk about trial lawyers and seem to want to point out the things that they do that they think aren’t good,” he said.

“No one talks about the fact that trial lawyers are out there representing people who have been injured. They are protecting people’s civil rights. … This bill does not give a windfall tax rebate to lawyers.

“All it does is allow them to claim expenditures that they have put out in the year that they have made that expenditure — no different than any other business in this country can do,” Arcuri said.

Kathleen Flynn Peterson, president of the American Association for Justice, in an e-mailed statement sent through a spokeswoman, reiterated that point: “By making this small change to the tax code, it clarifies that small businesses and sole proprietorships, no matter what kind, are treated the same way for tax purposes.”

Regardless of the provision’s merits, it does provide political hay for Republicans.

A GOP lobbyist working the issue said the tax change gives Republicans an opportunity to expose Democrats’ hypocrisy when it comes to special interest legislation.

“The Democrat leadership promised to drain the swamp, but instead they’ve chosen to reward their richest donors through legislation,” the lobbyist said.