Did anyone really think that the government was just going to extend tax credits without hiking taxes elsewhere? I didn’t. Even so, it is astonishing that Senator Reid has introduced an amendment to eradicate the deductibility of punitive damages for business in an effort to off-set the first-time homebuyer tax credit extension.

Naturally, people are concerned. The move runs contrary to 30 years of public policy; it also applies tort law principle on the tax code.

In plain English: it’s just a bad idea. As Andrew Moylan says, “this is yet another great example that this Congress will, at every turn, raise taxes instead of addressing runaway spending.”?

Ryan Ellis at ATR further explains why Reid’s amendment is a bad idea.?

If you want more details, read?this letter to the Senate from R. Bruce Josten, Executive VP of Government Affairs with the US Chamber of Commerce:

The U.S. Chamber of Commerce, the world?s largest business federation representing the interests of more than three million businesses and organizations of every size, sector, and region, opposes the offset included in Senator Reid?s amendment on the first-time homebuyer tax credit, SA 4344, to H.R. 4213, the ?American Jobs and Closing Tax Loopholes Act of 2010,? that would deny the deductibility of punitive damages for businesses.

The denial of deductions for punitive damages runs counter to 30 years of strong public policy and applies principles of tort law to the tax code. Under longstanding current law, companies are permitted to deduct almost all ordinary and necessary business expenses, including compensation, operating expenses, and compensatory and punitive damages. By denying the deductibility of punitive damages, the Reid amendment imposes increased costs on businesses, forcing them to spend more money litigating claims and thus forgoing their ability to use these funds to stimulate job creation and economic growth. Further, by taxing punitive damages, this amendment would incentivize the generation of more lawsuits since it would result in increased costs for companies for lawsuits while simultaneously decreasing the costs of lawyers to file lawsuits on behalf of plaintiffs by, among other things, increasing their leverage to force settlements. For example, plaintiffs? lawyers would use this provision to force the hand of business to settle frivolous or speculative cases, so that companies might deduct the amounts of those settlements rather than risking incurring non-deductible punitive damage awards. Finally, requiring insurance proceeds to be taxed as income would add unnecessary and unmitigated strains on American businesses. …

You’d think they would realize by now that money really doesn’t grow on trees.