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Joint Committee on Taxation Deems Structured Settlements a "De Minimus Expenditure"

The Joint Committee on Taxation has compiled its Estimate of Federal Expenditures for fiscal years 2010 to 2014.  Article by John McCulloch, IFS' V.P. Advanced Marketing, explains the effects on foreseeable future of 104(a)(2) exemption from income.


The Joint Committee on Taxation has compiled its Estimate of Federal Expenditures for fiscal years 2010 to 2014.  The report is prepared for the House Ways and Means Committee and the Senate Finance Committee and is used to help both policymakers and the public understand the uses to which government resources are put and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation. The report also is submitted to the House and Senate Budget Committees.
 

Tax expenditures are defined as revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.  Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. The estimates also may be useful in determining the relative merits of achieving specified public goals through tax benefits or direct outlays. It is appropriate to evaluate tax expenditures with respect to cost, distributional consequences, alternative means of provision, and economic effects and to allow policymakers to evaluate the tradeoffs among these and other potentially competing policy goals. The exemption from income of personal physical injury awards and settlements is one such tax expenditure.
 

A tax expenditure is measured by the difference between tax liability under present law and the tax liability that would result from a recomputation of tax without benefit of the tax expenditure provision. Taxpayer behavior is assumed to remain unchanged for tax expenditure estimate purposes. A provision traditionally has been listed as a tax expenditure by the Joint Committee staff if there is a reasonable basis for such classification and the provision results in more than a de minimus revenue loss, which is defined as a total revenue loss of less than $50 million over the five fiscal years 2010-2014. 
 

The exclusion of investment income from structured settlement arrangements, the cornerstone of our industry, is mentioned on page 29 of the report but is not included in the table of expenditures as it is considered to be below the de minimus amount of $50 million for fiscal years 2010 to 2014.
 

Author's Note: While no tax expenditure can be deemed "untouchable," it is nonetheless comforting to know that for all of the good that structured settlements provide, their tax revenue loss is, by Congressional standards, de minimus or minimal.  While some commentators fret about any review of Section 104, or trot out the taxation bogeyman of a Congress in search of revenue and what it might mean for the structured settlement industry, the reality is that a de minimus tax expenditure makes for an unlikely target, particularly one that allows injury victims to live with dignity and financial security.
 

 

 

 

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