A controversial proposal to significantly raise taxes on third-party litigation funding was ultimately excluded from the sweeping tax legislation signed into law by former President Donald Trump on July 4.
Initially part of the “One Big Beautiful Bill” (OBBB), the proposed measure sought to impose a nearly 41% tax rate on profits earned by third-party litigation funders. Critics of the industry have long argued that litigation financiers—especially international investors—pay little to no taxes on their earnings from U.S. legal proceedings.
Litigation funding, where investors provide capital for lawsuits in exchange for a share of any eventual settlement or court award, has faced increasing scrutiny from the insurance industry. Insurers claim the practice has contributed to rising legal expenses. A joint consumer report from the Insurance Information Institute (Triple-I) and Munich Re US estimates that litigation abuse costs the average American household $6,664 annually and adds $160 billion in tort-related costs for small businesses.
Insurers and their allies have pushed for regulatory and tax reforms to limit third-party litigation funding (TPLF), viewing the tax overhaul as a key opportunity to close what they call a loophole.
Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), described the tax increase proposal as a missed opportunity. “This would have been a win for Congress, the Trump Administration, and for American businesses and consumers,” he said in a statement to Insurance Journal.
However, just before the House was set to vote on the legislation, the Senate parliamentarian determined that the TPLF tax increase violated procedural rules for budget bills. As a result, the provision was removed from the final package.
“Thanks to misinformation, political bias, and lobbying from those profiting off America’s legal system, the Senate parliamentarian struck down the effort to close the foreign funder tax loophole,” Grande stated. “This decision leaves the door open for billions more in untaxed foreign investments to fuel excessive litigation, with American taxpayers left holding the bill as legal costs skyrocket.”
Last month, NAMIC had praised Republican lawmakers for pushing to eliminate what it called an unfair tax advantage for “exploitative funders.”
On the other side of the debate, the International Legal Finance Association (ILFA) welcomed the removal of the tax increase, calling it a “decisive win for Americans.” The global association, which represents the litigation funding industry, argued that TPLF plays an essential role in the justice system.
“Far from stopping abuse, this measure would have stripped individuals and small companies of a tool they rely on to take on powerful corporations,” ILFA said. “The real winners would have been the same large industries—like Big Tech, Big Pharma, and Big Insurance—that frequently try to dodge accountability.”