Leahy Proposes Bill To Stop Tax Breaks For Corporate Misconduct

Protecting American Taxpayers From Misconduct Act Will Eliminate Loopholes For Big Businesses Paying Punitive Damages

WASHINGTON (Tuesday, April 12, 2011) – Senator Patrick Leahy (D-Vt.) Tuesday introduced legislation to close a tax loophole that allows businesses to deduct the cost of punitive damage awards as an ordinary business expense.  The Protecting American Taxpayers from Misconduct Act will eliminate this tax break for corporate misconduct.

“Under current law, a corporation or individual business owner may deduct the cost of a punitive damage award paid to a victim as an ‘ordinary’ business expense,” said Leahy.  “This is wrong.  It undermines one of the primary deterrent functions of our civil justice system, and American taxpayers should not subsidize this misconduct.”

Punitive damages are assessed only in cases of severe misconduct that result in extreme consequences and are intended to impose a punishment so that more responsible decisions will be made in the future.  Leahy said the deterrent effect of punitive damages awards is lessened when they can be written off as a mere business expense. 

In its 2012 budget recommendations, the Obama administration requests eliminating the current deduction in tax code.  The Joint Committee on Taxation has estimated that eliminating the loophole will result in increased revenues of $315 million over 10 years.

“When corporate wrongdoers can write off a significant portion of the financial impact of punitive damages, the incentives in our justice system that promote responsible business practices lose their force,” Leahy said.  “These difficult economic times require us to close irresponsible tax loopholes.”

It was one year ago that a tragic explosion at the Big Branch mine in West Virginia claimed the lives of 29 miners, and an explosion on the Deepwater Horizon drilling rig in the Gulf of Mexico claimed the lives of 11 Americans and led to the worst oil spill in U.S. history.  Under current law, punitive damages resulting from these events will amount to a tax break for the corporations responsible.

The Protecting American Taxpayers from Misconduct Act is Leahy’s most recent effort to hold corporations accountable for misconduct.  Leahy is the chair of the Senate Judiciary Committee, and last year he chaired a hearing in the wake of the Deepwater Horizon disaster focused on corporate liability caps and how they affect corporate decision making.  Leahy has also authored legislation to increase criminal penalties for corporations and individuals who commit environmental crimes.

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