The Civil Rights Tax Relief Act: Questions and Answers

I've received a few questions about the Civil Rights Tax Relief Act of 2007 ("CRTRA"), which is currently pending in Congress so I thought it appropriate to post some information about the bill, what it is designed to do and who supports it.

The CRTRA is meant to end certain types of taxation of damages received by those who have suffered unlawful discrimination or violations of employment rights. The bill was introduced in Congress by John Lewis (D-GA), who was joined by abipartisan group of original cosponsors, including Representative Deborah Pryce (R-OH) and Ways & Means Committee Members Sander Levin (D-MI), Jim Ramstad (R-MN), Xavier Becerra (D-CA), and Phil English (R-PA). The bill number is H.R. 1540.

No one disputes that when employees face employment discrimination and other violations of their employment and civil rights, it is best if they avoid litigation by coming to amicable agreements with their employers. But too often, cases like this are difficult to settle because the cost of settlements is so high. A significant reason for the high cost is the excessive and unfair tax treatment of settlements and awards in employment rights cases.

Today there are two major sources of excessive and unfair taxes in such cases:

  1. taxation of damages for noneconomic harm that employees suffer as a result of egregious, intentional harassment, retaliation, or similar workplace wrongs; and
  2. taxation of lump-sum settlements or awards that compensate for lost back pay over a period of years at the artificially high marginal tax rates of the year of receipt.

These taxes drive up the cost of settlement of workplace-related cases for America's businesses, while at the same time reducing recoveries for victims of discrimination. They also create unfair and arbitrary distinctions among taxpayers. The CRTRA is designed to address these concerns. Here are some answers to some basic questions about the legislation:What Does the Civil Rights Tax Relief Act Do?The Civil Rights Tax Relief Act (CRTRA) solves these two problems by amending the tax code in the following two ways:

  • it eliminates noneconomic damages from gross income; and
  • it permits income averaging for back pay received in a lump sum.

How Will the CRTRA Help Employers?The CRTRA will significantly reduce the costs of employment- and civil rights-related litigation for companies. More cases will be settled before trial, and it will be less expensive for employers to settle them.How Will the CRTRA Help Employees?The CRTRA will help employees who have to sue to vindicate their rights by requiring that they pay tax only on the economic component of their awards. It will reduce the taxes employees pay on monies awarded as back-pay in lump sums by requiring that they pay tax at fair marginal rates. And it will make it easier to settle cases because employers will not have to pay as much to resolve meritorious claims.Who Supports The Legislation?Groups ranging from the U.S. Chamber of Commerce and the Society for Human Resources Management to the Leadership Conference on Civil Rights, The National Employment Lawyers Association and AARP have endorsed the legislation.

You can read a copy of the bill here.