Peter Mihalick: Double Taxation for Consumers is Bad Tax Policy

Republicans need to better identify the villain and to provide a convincing narrative to voters. Most people have no love for the Internal Revenue Service (IRS), yet some Republicans are being blinded by hatred of liberal leaning trial lawyers to oppose the double taxation of damages in lawsuits. Republicans should dislike the IRS, and revile bad tax policy, far more than they dislike trial lawyers.

Today, the IRS is even more unpopular than usual thanks to recent developments where the agency received billions from Congress to hire an army of new agents to harass taxpayers. The allocation of $45.6B for enforcement in the Inflation Reduction Act, which is intended to prevent wealth tax cheats from skirting the law and ensuring they pay their fair share. However, at a time when Congress is providing additional funding to hire tax collectors, they need to simplify the tax code in a common sense way to protect taxpayers without armies of accountants and lawyers.

Republicans might want to express some love for those middle-class taxpayers who end up being the winning plaintiffs in a consumer protection claim and then victimized again with extra taxation for successfully winning their case. This double taxation is part of federal tax law and bad policy Congress needs to address before the next election. Repealing the provision of the law would show that Congress really cares about voters and not just owning the libs.

This may seem like a niche issue that only impacts a small number of Americans, yet it is a good example of policy that sticks it to consumers. As usual with tax policy, the little guy gets the raw end of the deal. If the government wishes to minimize inflation, the repeal of the double taxation on consumer protection legal awards would have helped. 

Double taxation removes money out of the private sector and redistributes it to the government. A federal government that continues to rack up over $30 trillion in debt despite rising revenues – revealing the government has a spending problem. Reuters reported on August 23, 2022, that deficit projections for fiscal 2022 are lower than expected, because of “a $504 billion increase in revenues above levels forecast in March, mainly due to higher individual income tax receipts spurred by stronger job and wage growth, but also from increased corporate and excise taxes.” New record levels of revenue are being collected – but the federal government is addicted to spending money.

Many consumer protection cases take a long period of time to conclude – during which a plaintiff consumer will have fees for their legal representation.  When awarded the damages for the lawsuit, the consumer will be taxed on the winnings and the attorney will be taxed on the income received as part of the fees.  This can be problematic as the award will lift the tax bracket of the consumer and a significant amount of the winnings will be taxed twice. This is clearly a situation of unfair double taxation.

The good news is that there is a way to address the issue.  In the Senate, Sen. Catherine Cortez Masto (D-NV) has introduced legislation, the End Double Taxation of Successful Consumer Claims Act, to resolve the problem.  The Senator has several of her Democratic colleagues, including seven that sit on the Senate Finance Committee, supporting the bill. 

One would believe this would be an easy issue for conservatives to support because the idea of an overtaxed population is one that is near and dear to the hearts of right leaning voters. However, there are no Republicans cosponsoring the bill yet because it is seen as an issue which benefits trial lawyers – a political bogeyman for many Republicans. Republicans are on firm ground to not be big fans of trial lawyers, yet that should not taint their views on addressing a bad policy which unfairly treats wronged consumers. Owning the libs is not really a policy position – at least one that rights this unfair treatment.

Republicans should hate the IRS more than they hate trial lawyers, but they don’t yet see it that way. Conservatives should push solid tax policy including removing any provision of federal tax law which unfairly hammers average American taxpayers with double taxation.

Peter Mihalick is former legislative director and counsel to former Reps. Barbara Comstock, Virginia Republican, and Rodney Blum, Iowa Republican.