I am working on a paper for the Georgetown Journal of Legal Ethics 2016 Symposium issue on the relationship between access to justice, legal ethics and commercialization. It as been a great opportunity to think about creating ways of transcending some of the tensions and interplays between those three themes.
During this process, I realized that we never ever talk about the impact of the tax code on access to justice. This is largely because we think of ATJ initiatives funding as all coming from tax exempt resources, either government money, or tax exempt funders.
But, once we move to thinking about middle income people who are not eligible for traditional community based means tested legal aid, and we deal with those who are paying for their own access to justice costs, we find the following astonishing facts (as I understand them from IRS pub 529, subject to expert correction — do use not my tax thoughts as guidance in preparing your own return!):
As a general matter, landlords get to deduct their legal fees as business expenses. But the typical tenant does not, no matter what the financial implications are for them of being evicted, since personal legal costs are not deductible.
The same with banks, personal loans, credit cards, etc. One side get to deduct, the other does not.
So, the tax code is making a huge contribution to landlords and banks, while doing nothing for almost always poorer other side (unless the are being serviced by those who received a deduction for a cash or equivalent donation.)
Note that this is not caused by the rules governing itemization of deductions, but by the underlying deduct-ability itself. I have no idea of the total subsidy, but I am sure it is huge.
One can imagine a rule that allows for deductabiity of legal or equivalent expenses in any dispute in which the other side can deduct. It would also be important to structure the deduction so that it could be taken even by those who do not itemize, and perhaps even taken in an alternative manner such as a credit or a so-called refundable credit.
But, once you start thinking about the tax code, you realize all kind of other possibilities. Pro bono work by lawyers is not considered a deductible contribution, but surely when a lawyer, specifically licensed to perform a task, does that for free for a tax exemmpt organization, shouldn’t there be different treatment? Or, maybe there are other ways of lessening certain kinds of tax rules for those who do pro bono.
Of course, with all such tax expenditures, it is important to try to structure them so that you do not end up reducing tax revenue significantly, while not getting an appropriate change in behavior. The problem is that when a lot of money is already being spent in an area (such as eviction defense), making it newly deductible can result in a big increase in deductions, even before it draws more lawyers into doing the work, or encourages more tenants to pay a lawyer or other authorized professional. This might require some very skilled drafting to avoid such an outcome.
But the fact remains. Its an astonishingly powerful argument that the IRS is subsidizing people who are trying to get people out of their homes, but not those trying to stay in them. (except, as discussed above through deduct-ability of tax exempt contributions, a tiny portion of the costs in this area, which in any event also help low income landlords.)
Even if it turned out to be hard to generate an effective tax change in this direction, this way of looking at things provides a useful rebuttal to those who try to stop government funding of tenant assistance programs, on the grounds that it is not fair to landlords.
Any ideas and thoughts on how the tax code could be leveraged for ATJ at state, local, or municipal levels, much appreciated. Surely this is a surface we have only just begun to scratch.