Jarrell Cook

Bill to ban deductions from incomes taxes of punitive damages from litigation gets hearing

By Jarrell Cook, Associate Policy Director

Capitol Update, March 10, 2017 Share this on FacebookTweet thisEmail this to a friend


SB 66 by Senator Bob Wieckowski (D-Fremont) is scheduled for a hearing on March 22nd at 9:30am by the Senate Committee on Governance and Finance. The bill would prohibit businesses from deducting punitive damages they incur as a result of litigation from their income taxes as necessary business expenses.

In California, there is no cap on what a jury may award as punitive damages nor are there any fixed principles that guide their decision. This creates a potential loss for manufacturers facing a lawsuit that adds unnecessary uncertainty to California’s business climate. Especially when they may face multiple lawsuits – frivolous or not – that arise from the same conduct. The release valve for this pressure is the ability for businesses to deduct these damage awards as expenses and incorporate them into their operating budget.

Moreover, the scope of SB 66 includes settlements. Businesses often settle to avoid extensive and expensive litigation to control costs, not because there was a determination that they engaged in any wrongdoing. The bill creates an opening for an ever-increasing amount of fly-by lawsuits where the goal of the litigation is to pressure the company into settling quickly.

Experts in tax policy agree that these deductions are a key incentive for businesses to settle claims out of court, which is good for taxpayers and consumers. Without this safety valve, small manufacturers could find themselves in jeopardy and unable to survive the costs of an unexpected lawsuit. Such a legal climate chills investment and discourages entrepreneurship. Nobody wins when manufacturers are shutting their doors.

For more information or to discuss how this bill would affect you, please contact Jarrell Cook, Associate Policy Director for Governmental Relations, at jcook@cmta.net or by phone 916-498-3356.

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