An interesting article on legal reform:
February 15, 2001
Politics & Policy
Bush Considers Adding Tax
On Lawyers' Huge Legal Fees
By JOHN D. MCKINNON
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- The Bush administration, fresh off a campaign during which lawyers poured unprecedented sums into Democratic coffers, is considering a special tax on huge legal fees.
Trial lawyers said the Bush proposal would be aimed squarely at them, and tort-reform advocates said it could be crafted to hit future payments to the lawyers who successfully sued the cigarette industry on behalf of the states. The tobacco settlement exceeds $200 billion over 25 years. Lawyers stand to collect fees totaling more than $10 billion over 20 years from those cases. Some Republicans worry that the windfall could make the lawyers' Democratic allies even more formidable foes.
The Bush administration is dusting off a campaign proposal to tax legal fees that are deemed excessive. The tax would apply mainly to trial lawyers, who often get paid with a share of their clients' awards.
"The Republicans are saying, 'We're going to tax our political enemies at a greater rate than our political friends,' " said Richard Scruggs, a Pascagoula, Miss., lawyer who helped lead the trial team that brought Big Tobacco to the bargaining table. Mr. Scruggs said he believes such a tax would be unconstitutional. It also would face high hurdles in a narrowly divided Congress.
But defenders of the idea say it would be constitutionally defensible, and also could raise billions more for states. "The whole premise of the proposal is that what the lawyers did was wrong," said Michael Horowitz, a Hudson Institute fellow who advised the Bush campaign on the idea.
A White House spokeswoman said the administration's proposal wouldn't attempt to "alter" the fees that already exist in the tobacco case. But she couldn't say whether it would attempt to tax fees that will be paid out down the road. The president "campaigned on it and he remains committed to the priorities he laid out," she said.
Even if the Bush administration doesn't attempt to tax the tobacco fees, members of Congress will, some tort-reform advocates predicted. Plaintiffs' lawyers in the tobacco cases "are vulnerable to a number of efforts to make sure those excess fees are returned to the states," said James Wootton, president of the U.S. Chamber of Commerce's Institute for Legal Reform. He noted that Texas officials have actively sought to win back some legal fees from the tobacco litigation.
When President Bush first raised the notion last year as part of a sweeping tort-reform agenda, he described it as an "excess benefits" tax on fees that lawyers win in the course of representing state and local governments. The proposal defined "excess benefit" as any money collected in beyond a reasonable amount.
Current methods of assessing fees in mass-claim cases vary, though they often generate amounts that tort-reform advocates find excessive. Mr. Bush's idea would define reasonableness based on an hourly rate, and multiply that amount by a factor -- say, two or six -- depending on the risk involved.
The proposal didn't specify a tax rate, but said the tax would be similar to levies Congress has applied to corporate golden parachutes and the bloated salaries of some executives of nonprofit organizations. The excess-benefits tax on executives of nonprofits can reach 200%, unless the executive returns the overpayment.
The issue has been on the back burner, but is beginning to heat up again as the new administration prepares its legislative agenda. The threat of such a tax could disrupt the tobacco lawyers' efforts to cash out their winnings, currently being paid out over a period of years.
Concerned about tobacco companies' sustained solvency -- and possibly worried about a new tax -- some lawyers are considering securitizing their fees, that is, taking cash now from investors in exchange for assigning their rights to the future income stream. The first of those deals went through this week, with a group of lawyers in four states taking about $300 million in return for almost $1 billion in fees payable over 12 years.
As a group, lawyers are the Democrats' best donors, according to the Center for Responsive Politics. They gave $97.8 million in the 2000 election cycle, up from $71.2 million in 1996 and $53.9 million in 1992. More than two-thirds of lawyers' donations went to Democrats.
-- Jeanne Cummings contributed to this article.
Write to John D. McKinnon at john.mckinnon@wsj.com1 |
