The Senate is voting this week on a series of amendments to the Tax Extenders Bill, H.R. 4213.
Senate Majority Leader Harry Reid (D-Nev.) has offered an amendment which would extend the "close-by" date of homes in order to qualify for the first-time homebuyer credit from before July 1, 2010 to before October 1, 2010.
In order to "pay for" this extension of existing tax relief, Reid proposes denying businesses a tax deduction for punitive damages paid in connection with a lawsuit. There are three good reasons to oppose this amendment, even if it is tax revenue-neutral:
- Businesses have a blanket ability to deduct "ordinary and necessary" expenses against business revenue. Arbitrarily taking a very legitimate expense away is both bad tax policy now and bad tax precedent for the future. It skews a proper understanding of business profits
- Trial lawyers will be emboldened to sue employers, since they know that an employer's downside risk is now magnified (since the employer can no longer deduct any resultant punitive damages from business income). Employers will want to settle, handing trial lawyers a guaranteed victory
- Since costs associated with settled cases would still be deductible, that's yet another tax code bias in favor of trial lawyers. More lawsuits will be filed, more of them will be settled out of court, and trial lawyers get very, very rich in the process
If the goal is to "pay for" an extension of the first-time homebuyer credit, the offset should be a spending cut.