The Joint Committee on Taxation (JCT) has released its Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCT Report) and the estimated tax revenue loss for structured settlements may surprise many structured settlement and settlement planning stakeholders.
The first surprise: for what appears to be the first time, the JCT staff actually calculates an estimated tax revenue loss for the "exclusion of investment income from structured settlement arrangements" in its annual JCT Report.
The second surprise: the JCT Report estimates the structured settlement tax revenue loss to be "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.
The JCT staff prepares its report on tax expenditures annually for the House Ways and Means Committee and the Senate Finance Committee for their use in budget analysis and for determining the relative merits of achieving specific public policy goals through tax benefits or direct outlays. The JCT staff also submits its tax expenditure report to the House and Senate Budget Committees. "Tax expenditures" are defined in the Congressional Budget and Impoundment Control Act of 1974 (the "Budget Act") and include any reductions in income tax liabilities resulting from special tax provisions or regulations that provide tax benefits to specific taxpayers.
Since 1982, IRC section 104(a)(2) has included a tax subsidy for structured settlements and periodic payment judgments. Under IRC section 104(a)(2): gross income does not include "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness". When utilized as settlements, such periodic payment agreements are commonly referred to as "structured settlements".
JCT Reports historically do provide estimates of tax revenue loss resulting generally from the "exclusion of damages on account of personal physical injuries or physical sickness". The current JCT estimate for 2010-2014 is $7.9 billion. Until this year, however, the JCT Report never provided a specific estimate for structured settlements.
The JCT estimate of "de minimus" structured settlement tax revenue loss (under $12.5 million per year) appears especially small compared with statements from structured settlement and some settlement planning consultants aggressively promoting structured settlement tax savings for injury victims.
Compare also the value of the structured settlement tax subsidy as estimated by Jeremy Babener in his 2009 paper titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlement Monies"- between $360 million and $840 million per year.
Admittedly a "back-of-the-envelope range", Babener generated his tax subsidy estimate based upon input from structured settlement:
- authors - including Law Professor Adam Scales;
- experts - including William Neff, a tax partner at Hogan Lovells; and
- practitioners - including Joseph Tombs, Chairman of the Registry of Settlement Planners.
As documented in footnote 16 of Babener's paper, both Scales and Neff estimated the IRC section 104(a)(2) tax subsidy adds at least 20% to the value of certain structured settlements. Because of low income and/or deductions, however, not all structured settlement recipients benefit from the tax subsidy. Tombs estimated that only 30% of structured settlement recipients actually receive a significant reduction in their future income taxes while Neff believed the majority of structured settlement recipients are net taxpayers.
To calculate his $360 million to $840 million estimate of annual structured settlement tax benefits, Babener assumed:
- $6 billion per year of structured settlement annuity premium;
- A range of 30% to 70% as the likely percentage of structured settlement recipients receiving the tax benefit;
- An average 20% tax benefit for every structured settlement recipient who actually does receive a tax benefit.
Babener additionally pointed out::
- The value of the structured settlement tax subsidy also constitutes lost revenue to the U.S. Treasury;
- The cost of the subsidy to the U.S. Treasury in lost revenue has been largely ignored in structured settlement literature;
- Potential government savings exist that accompany the structured settlement tax loss including a reduction in the number of public benefit dependents.
Currently a NYU Tax LL.M. Candidate, and a former Fellow at the U.S. Treasury's Office of Tax Policy, Babener's writing appears on his website Tax Structuring and is featured on S2KM's structured settlement public policy wiki.