In our contentious, budget-conscious spending environment, even sacred cows have faced the knife. Many federal tax subsidy programs, long considered untouchable -- such as mortgage deductions and charitable donations -- have been scrutinized. In the debates surrounding these subsidy programs, a basic question lawmakers have had to grapple with is whether a subsidy is worth spending taxpayer money on, based on how well it incentivizes socially-beneficial behavior.
Ironically, the one tax subsidy that specifically incentivizes social harm rarely received congressional attention until recently. Little to no scrutiny was placed on the loophole that will allow JPMorgan to claim up to a $4 billion tax deduction for its recent record-breaking $13 billion settlement for alleged mortgage fraud. Under the current law, last year a court refunded $50 million to a health care company that argued it deserved a tax write-off for the hundreds of millions of dollars it paid the government to settle allegations that it defrauded Medicare and other federal healthcare programs. Similarly, BP was able to collect a $10 billion tax windfall for its Gulf oil spill cleanup costs.
These undeserved subsidies for wrongdoing occur because the law that prohibits companies from deducting fines or penalties as a tax write-off does not apply to companies that resolve charges through out of court settlements, unless agencies specifically forbid the write-offs as part of the settlement agreement.
What's more, since many agencies don't disclose the terms of these settlements, the extent of the problem remains largely obscured from the public. And, when taxpayers can't find out how many of their tax dollars go to subsidizing corporate wrongdoing, it's that much harder to hold federal agencies accountable.
This largely hidden subsidy costs taxpayers billions of dollars every year and dilutes the disincentive that federal regulations are meant to pose against harmful and deceptive misdeeds such as oil spills, banking scandals and marketing dangerous products.
However, all that could change shortly. Today, bipartisan legislation was introduced by Sens. Elizabeth Warren (D-MA) and Tom Coburn (R-OK) that would shine a new light on closed-door deals signed between the federal government and corporations charged with serious wrongdoing. The bill will require federal agencies to come clean in public statements about whether any portion of a settlement is potentially tax deductible. It will also require agencies to disclose other key details of all settlement agreements on their websites. Any settlement deemed confidential by an agency will require a written reason for its confidentiality.
The Warren-Coburn bill comes on the heels of another bipartisan bill introduced in November that would restrict corporations from reaping massive tax deductions for many kinds of settlement payments altogether. Together, the bills would bring unprecedented scrutiny, consumer protection and public accountability to the deals that the federal government strikes with corporate wrongdoers on our behalf.