Gregg D. Polsky (NYU; Google Scholar), Something New Under the Sun: Tax Weaponization via Reconciliation, 187 Tax Notes Fed. 2483 (June 30, 2025):
Tucked within the nearly 550 pages of the mammoth Senate Finance Committee’s reconciliation bill is a strange provision that will, if included in the final legislation, effectively destroy an entire industry without any hearings or deliberation. Having studied the tax code for over 25 years, I have never seen anything like it before. Besides the provision’s ambiguities and technical problems, it would set a terrible precedent in the tax legislative process. Any industry with even only a handful of powerful detractors should be very concerned that the proposal has managed to get this close to enactment.
The provision, section 70605 of the draft Senate reconciliation bill, takes direct aim at the litigation finance industry by subjecting it to a new, exorbitant excise tax. Litigation finance firms raise capital from investors (mostly institutional investors like pension funds and endowments) that is made available to plaintiffs or their lawyers in lawsuits. In exchange for the funding, the plaintiffs or their lawyers agree to pay a specified amount of any eventual recovery in the lawsuit. The funded lawsuits are carefully vetted because, if the lawsuit underperforms, the investors stand to lose much or all of their investment.
Litigation finance serves two primary constituencies. Plaintiffs are often highly risk averse because they are undiversified — their lawsuit is typically of the “one shot” variety. A defense verdict or a disappointing recovery could be devastating for a plaintiff. Insurance companies, self-insured corporations, and other deep-pocketed defendants, on the other hand, are far less risk averse because they have a diversified basket of claims to defend. Some will be winners and others losers, but for diversified defendants, life goes on. Contingent fee lawyers, while better diversified than their clients because of their portfolio of cases, are also often less diversified than the defendants they are suing. To better level the playing field, litigation finance shifts litigation risk from litigants and contingent fee lawyers onto well-diversified institutional funders.
Litigation finance also serves institutional investors. Traditional investments are tightly correlated with the broader market. Public company stock, private equity, venture capital, and real estate are all highly sensitive to economic conditions. Institutional investors therefore actively seek investment opportunities that are more insulated from economic downturns. Litigation finance satisfies this demand. While economic downturns could affect litigation outcomes — for example, a bankrupt defendant might not be able to pay a large settlement — litigation funding is far less sensitive to market fluctuations than traditional investments. …
Besides the various ambiguities and technical concerns from this hastily drafted and poorly conceived proposal, it is extremely concerning from a tax legislative process perspective. Even though the litigation finance industry benefits plaintiffs and their lawyers, as well as institutional investors, it has some vocal detractors, who argue that the industry foments litigation or otherwise harms the civil justice system. While I personally disagree with these critiques, my main concern is the disturbing precedent that would be set if this proposal is ultimately included in the enacted tax legislation.
The tax code is famously riddled with special deductions, exclusions, credits, and other loopholes granted to politically powerful industries. These tax expenditures are often criticized for their nontransparency, disruption of free market forces, potential for waste, and mind-numbing complexity. Despite these critiques, tax expenditures remain pervasive. Yet, tax policymakers have thus far resisted the temptation to create special tax rules designed to decimate a particular industry. This proposal, if enacted, would represent an unfortunate turning point.
Making matters worse, the proposal is a minuscule part of a fast-moving, too-big-to-fail reconciliation bill. That an entire industry could be destroyed in this manner, without any hearings or even deliberation and as a last-minute footnote in an enormous reconciliation bill, should frighten all Americans because their livelihoods could be next.
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