In Christian Petrucci’s latest article for The Legal Intelligencer, he tackles the issue of taxing legal services and its effect on injured workers. Though no legislation has been passed to do so, Christian takes the time to dissect the potential effects on Workers’ Compensation and the injured people who depend on it. Read an excerpt of the article below, and follow the link at the bottom to read the full article:
While it would appear that we have dodged a bullet yet again in the current legislative session, the move to tax legal services has intensified in the last few years. Most recently, the bill made it as far as it ever has when, last month, it passed in the Pennsylvania Senate Finance Committee in bipartisan fashion, by one vote. There seems to be little stomach for the full Senate to take up the measure given the impending governor’s race, to say nothing of the House. However, should the bill ever become law, it will severely injure those dependent on the already-deficient workers’ compensation system. This consequence, intended or otherwise, should be strongly considered before any legislator casts a vote.
The bill in question, SB 76, the Property Tax Independence Act, is designed to change the way school funding is raised in Pennsylvania by eliminating the school property tax and replacing it with an expansion of both the amount and nature of the sales tax and an increase in personal income tax. As it pertains to the legal profession, the act would expand the sales tax base to include the taxation of certain legal services. While the need for property tax reform is real, shifting the burden from homeowners to people who need legal representation is a terrible idea.
Both the Pennsylvania and Philadelphia bar associations have formally opposed the legislation, and for good reason. A primary argument against Pennsylvania imposing a tax on legal services centers around the notion that it would hurt certain firms’ ability to compete with other jurisdictions. Given that workers’ compensation remains a practice particular to state law, this very valid argument is not a consideration for workers’ compensation practitioners. However, opposition to the tax in the workers’ compensation bar is equally strong for other reasons.
As with any sales tax, the proposed tax on legal services is extraordinarily regressive. Rich and poor alike both require legal services from time to time. Unlike many luxury or consumer items, the need for legal services is almost never a choice. As an example, being injured on the job is something no one would choose for himself or herself. Nonetheless, hiring an attorney is a necessity foisted upon most workers who sustain more than the most minor of injuries. Many of these individuals are forced to remain without an income for a year or more, making them indigent, if they were not already prior to being injured.
In his testimony to the Senate Finance Committee regarding a similar bill from the last legislative session, past president of the Pennsylvania Bar Association, Thomas G. Wilkinson, stated: “Access to justice is a basic constitutional right, and justice is not a commodity for sale like an automobile or furniture, but rather a key basis for a functioning civil society. Effective legal representation routinely requires legal counsel. A sales tax on legal services places an undue and unjust burden on the legal system, a burden particularly felt by those of lesser means, and therefore on the equal access to justice.”
This statement is true as a general proposition. It is particularly relevant to those injured on the job who are generally the least able to shoulder the burden. Often the amount received in workers’ compensation payments (assuming one can even get those payments in the first instance) is a fraction of a worker’s normal pay. The benefits are first reduced by the compensation rate schedule and diminished further by the 20 percent attorney fee. The tax would force injured workers to pay from their compromised indemnity benefits an additional 7 percent tax on the services they had little choice in accepting. There is also almost no ability to “shop around,” (as if one would select a lawyer based on the amount of the fee) as a 20 percent fee is standard across the industry. This additional tax could add up to an annual expense in the hundreds of dollars. Moreover, given that a disproportionate number of workers’ compensation cases arise out of Philadelphia County, the tax would be all the more onerous to those injured in Philadelphia, where legal services would be taxed at a rate of 9 percent.
Tangentially relevant to the workers’ compensation practitioners’ opposition to SB 76 is the notion that the sales tax could result in lost business and fewer jobs. This would thwart any benefit in replacing the current school funding mechanism in the first instance. Receipts realized from sales and income tax are economy-based. Tax collections are obviously reduced when the economy is not doing well. Property taxes, on the other hand, generally remain constant, irrespective of economic factors. The resulting inability to formulate a budget following the imposition of a sales and income tax-based model would harm the school districts the bill is intended to help.
Finally, the practicality of law firms collecting taxes is nonexistent. The legal industry has never been one to pay sales tax. Unlike retailers of hard goods who could immediately begin collecting sales tax on items not currently taxed, law firms would have to enter the realm of being agents of the government and pay for the resulting accounting services (and the new taxes that would go with that). The industry is not designed to collect taxes.
Pennsylvania’s current budget allocates funding for legal services to the indigent. This is an implicit acknowledgment that the need for legal services is different from any other consumer good or service. Hopefully the legislators, most of whom are lawyers, will come to their senses and figure out another way to achieve property tax reform. In order to assist in that process, you may wish to utilize the Philadelphia Bar Association’s website, which has a Legislative Action Center item specifically for the bill at http://goo.gl/tO85UZ.