Professor Dan Markel co-authored a NY Times op-ed in June, arguing that plaintiffs’ lawyers should be permitted to tell juries that punitive damages are tax deductible, which would encourage juries to award larger amounts to offset the effect of the deduction. I questioned the proposal on the ground that it would require a complicated inquiry into the defendant’s tax situation, and would invite speculation by the jury about future events. Drug & Device Law didn’t like the proposal much either.
Prof. Markel has now written a new article in which he acknowledges that there is a “dark side” to tax-aware juries, namely, that windfall awards to plaintiffs would be magnified. His new article (Overcoming Tradeoffs in the Taxation of Punitive Damages) advocates reforms that, he says, “stake out a more nuanced middle path between those scholars and policymakers touting nondeductibility for all punitive damages and those endorsing the current rule allowing a deduction for all punitive damages paid by business defendants.” Prof. Markel’s proposal is a bit complex, but as far as I can tell, he proposes to adopt a new name for punitive damages (“extracompensatory damages”), which would consist of three different components: retributive damages, aggravated damages, and deterrence punitive damages, each of which would serve a purpose that is currently served by punitive damages. The latter two components would remain tax deductible, and the tax treatment of the first component is less clear. The complexity of this whole scheme makes it highly unlikely that any state would ever adopt it.
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