The Senate voted yesterday to pay for a 90-day extension of the home buyer's tax credit by adopting the Obama Administration's proposal to eliminate the deduction for punitive damages. Linda Beale (Wayne State) applauds the move. In their forthcoming article, Taxing Punitive Damages, 96 Va. L. Rev. ___ (2010), Dan Markel (Florida State) and Gregg Polsky (Florida State; moving to North Carolina), critique the idea:

To solve this problem of under-punishment, many scholars and policymakers, including President Obama, have proposed making punitive damages nondeductible in all cases. In our view, however, such a blanket nondeductibility rule would, notwithstanding its theoretical elegance, be ineffective in solving the under-punishment problem. In particular, defendants could easily circumvent the nondeductibility rule by disguising punitive damages as compensatory damages in pre-trial settlements. Instead, the under-punishment problem is best addressed at the state level by making juries “tax aware.”

See also Geistfeld on Taxing Punitive Damages, by Markel & Polsky (May 4, 2010).

Update: Blog of the Legal Times, Senate Moves to End Punitive Damages Tax Deduction.