Treasury Examined Litigation Funding Tax Policy
Treasury Secretary Scott Bessent testified on potential tax changes for third-party litigation financing on Sept. 15, 2026.
Updated on Oct. 8, 2026 in Law
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Treasury Secretary Scott Bessent testified before the House Financial Services Committee on Sept. 15, 2026, regarding the tax treatment of third-party litigation financing. The hearing examined proposals to tax income that third-party entities receive from legal settlements.
Why it matters
Proponents argue that litigation financing allows investors to convert ordinary income into lower-taxed capital gains while increasing costs for businesses. Insurance groups contend that these financial arrangements contribute to significant annual losses in U.S. economic activity.
The Tackling Predatory Litigation Funding Act, or H.R. 3512, proposes a 50% tax withholding on payments to third-party funders, with exemptions for agreements under $10,000. The bill currently maintains 39 House co-sponsors.
The players
Scott Bessent
Scott Bessent is the United States Secretary of the Treasury.
Kevin Hern
Kevin Hern is a member of the U.S. House of Representatives who serves as the sponsor for H.R. 3512.
Thom Tillis
Thom Tillis is a United States Senator who serves as the sponsor for the Senate companion bill to H.R. 3512.
National Association of Mutual Insurance Companies
The National Association of Mutual Insurance Companies is an organization that advocates for the interests of mutual insurance carriers.
The details
The legislation defines third-party litigation financiers as entities providing funds via written agreements to plaintiffs or law firms. Supporters like the National Association of Mutual Insurance Companies claim excessive tort costs equate to an annual reduction of $602 billion in U.S. business activity.
Timeline
September 15, 2026: Treasury Secretary Scott Bessent testified at a House Financial Services Committee hearing.
Political Context
The proposed legislation amends the Internal Revenue Code to alter how third-party litigation income is taxed, marking a departure from current definitions of taxable investment revenue. Opponents of this shift often argue that such measures could restrict access to the legal system for plaintiffs with limited financial resources.
Proponents suggest that excessive tort costs result in an annual tax of $5,579 per family and $1,771 per resident. If enacted, the legislation aims to reduce these costs by curbing the financial incentives that currently drive high levels of litigation.
The takeaway
Legislators are scrutinizing the impact of litigation financing on the broader U.S. economy. The proposed tax adjustments reflect an ongoing effort to mitigate the influence of third-party investors in the civil justice system.
Further reading
For more background on legislative developments, visit Law.
Source note: This article includes information reported by Transport Topics.
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