Following the 2024 election, Republicans gained control of both chambers of Congress and the presidency. Rather than pursue piecemeal legislation, they advanced a comprehensive reconciliation package—H.R. 1—known as the One Big Beautiful Bill Act (OBBBA). President Trump signed the bill into law on July 4, 2025, permanently extending many provisions of the Tax Cuts and Jobs Act (TCJA) while introducing significant new tax and spending measures.
The legislation delivered several key outcomes, including expanded standard deductions, an increase to the state and local tax (SALT) deduction cap to $40,000 for five years, and immediate expensing provisions for capital investment. According to the Congressional Budget Office (CBO), the law adds approximately $3.4 trillion to primary deficits over ten years, with total debt impact estimated at $4.1 trillion when interest costs are included.
The Litigation Funding Tax Proposal
During the Senate’s consideration of the bill, Senator Thom Tillis (R-NC) introduced the Tackling Predatory Litigation Funding Act, which was incorporated as an amendment to impose a substantial excise tax on litigation financing. Under this provision, litigation funders and related covered parties receiving qualified litigation proceeds through a financing agreement would face an initial tax rate of 40.8 percent—equivalent to the highest individual income tax rate of 37 percent plus a 3.8 percent surcharge. The rate was subsequently revised downward to 31.8 percent before the provision was ultimately removed.
Senator Tillis and Representative Kevin Hern (R-OK), who introduced companion legislation in the House, argued that the tax would generate revenue from a largely untaxed and opaque sector while targeting foreign-funded litigation vehicles that profit from the American legal system without paying U.S. taxes. Critics contended that such a tax would fundamentally disrupt litigation finance models, increase costs for plaintiffs, and restrict access to legal remedies—particularly for smaller plaintiffs or defendants who rely on third-party capital to pursue meritorious claims.
The Case for Litigation Funding: Why Proponents Opposed the Tax
Defenders of the litigation finance industry mounted a vigorous opposition to the proposed tax, arguing that it would fundamentally undermine access to justice for ordinary Americans and small businesses. Their primary contentions centred on several key themes.
Levelling the Playing Field
Proponents argue that litigation funding serves as a critical equaliser in a legal system where wealth often determines outcomes. Without third-party capital, individuals and small businesses frequently cannot afford to pursue legitimate claims against well-resourced corporate defendants with substantial legal budgets and the ability to engage in protracted litigation strategies designed to exhaust opponents financially. As one New York Supreme Court Justice observed, litigation funding allows lawsuits to be decided on their merits rather than based on which party has deeper pockets or a stronger appetite for protracted litigation.
Non-Recourse Risk Transfer
A distinctive feature of litigation finance is its non-recourse structure: if a funded case is unsuccessful, the plaintiff owes nothing to the funder. This arrangement transfers the financial risk of litigation away from individuals who may have valid claims but cannot afford the potential consequences of defeat. For plaintiffs facing opponents with the resources to appeal adverse decisions or prolong proceedings indefinitely, this risk mitigation can be the difference between pursuing justice and abandoning meritorious claims.
Rigorous Case Selection
Industry advocates emphasise that litigation funders conduct extensive due diligence before committing capital, typically funding fewer than five percent of cases presented to them. This rigorous vetting process—which can involve hiring external law firms and spending hundreds of thousands of dollars assessing merits—means that funded cases are generally strong rather than frivolous. The argument that funding encourages meritless litigation, they contend, ignores the economic reality that no rational investor would commit millions of dollars to cases with poor prospects of success.
Broader Economic Benefits
Beyond individual plaintiffs, proponents note that litigation funding supports the broader economy by enabling enforcement of intellectual property rights, contract obligations, and consumer protections. Patent holders, in particular, often require external funding to enforce their innovations against well-capitalised infringers. A punitive tax approaching 40 percent, critics argued, would effectively render many patent enforcement actions economically unviable, allowing large corporations to appropriate technology from smaller inventors with impunity.
The Case Against Litigation Funding: Why Critics Sought Heavy Taxation
Opponents of litigation funding—including many who supported the proposed tax—view the industry as fundamentally problematic and believe that heavy taxation represents an appropriate mechanism to curtail its growth or eliminate it entirely. Their arguments encompass concerns about legal system integrity, economic harm, and national security.
Encouraging Frivolous Litigation
Critics contend that litigation funding incentivises the filing of non-meritorious or speculative claims by eliminating the financial risk that traditionally discourages such suits. Since funders cover legal expenses and plaintiffs owe nothing if they lose, the argument runs, claimants face minimal downside from pursuing marginal cases. The U.S. Chamber of Commerce and allied business groups assert that this dynamic has contributed to a surge in litigation that drives up costs for defendants—costs ultimately passed along to consumers, workers, and shareholders. The Chamber estimates that excessive litigation costs American households thousands of dollars annually.
Distorting Settlement Dynamics
Opponents argue that third-party funders, motivated by maximising returns rather than achieving a fair resolution, distort the natural settlement process. Because funders profit most from large judgments or settlements, they may pressure plaintiffs to reject reasonable settlement offers in favour of continued litigation—even when settlement would serve the plaintiff’s interests. Critics supposedly point to cases where funders allegedly prevented parties from accepting settlements, effectively trapping litigants in lawsuits they wished to conclude.
Foreign Adversary Exploitation
Perhaps the most potent argument advanced by tax proponents concerns national security. Detractors warn that foreign governments and sovereign wealth funds—including those controlled by geopolitical adversaries—can secretly fund litigation targeting American companies in strategic industries. This funding operates largely in the shadows, with no comprehensive federal disclosure requirements revealing when foreign capital backs domestic lawsuits. Senator Tillis emphasised that foreign investors currently enjoy favourable tax treatment on litigation returns, creating perverse incentives for adversarial nations to invest in American litigation as a tool of economic warfare.
The U.S. Chamber of Commerce’s Institute for Legal Reform has documented instances where Chinese litigation finance firms funded intellectual property lawsuits against American technology companies, potentially gaining access to sensitive business information through the discovery process. It is argued that the combination of opacity and foreign involvement transforms American courtrooms into venues for state-sponsored economic disruption.
Tax Arbitrage and Inequity
Supporters of the tax highlighted what they characterised as an unfair disparity in tax treatment. Under current rules, litigation funders—particularly foreign investors—can structure their returns as capital gains, paying far lower rates than the injured plaintiffs whose claims generated those returns. Foreign investors, in some cases, avoid U.S. tax obligations entirely despite using American courts to generate profits. Senator Tillis described this situation as both unfair and untenable, arguing that if American plaintiffs pay ordinary income rates on their recoveries, the investors bankrolling those claims should not enjoy preferential treatment.
Why the Proposal Proved Controversial
The proposed tax on litigation funding sparked significant debate across the legal and financial communities. The provision’s novelty and its targeting of an industry that had operated with relatively limited regulatory oversight raised concerns about legislative clarity and unintended consequences. Access-to-justice advocates warned that imposing a tax approaching 40 percent could effectively price many plaintiffs out of pursuing otherwise meritorious claims, undermining the fundamental role of litigation finance in levelling the playing field against well-resourced defendants.
Notably, opposition emerged from unexpected quarters. Some conservative groups expressed concern that broad disclosure requirements accompanying the tax could chill funding for legitimate conservative causes and civil rights litigation, raising First Amendment implications. This unusual political alignment—with progressive access-to-justice advocates and some conservative organisations both opposing the measure—complicated the legislative path forward.
Legislative Journey: From Proposal to Removal
Senate Phase and Parliamentarian Review
The Senate Finance Committee incorporated the litigation funding tax provision into its draft reconciliation bill released on June 16, 2025. However, on June 30, 2025, Senate Parliamentarian Elizabeth MacDonough ruled that the provision violated the Byrd Rule, which governs what can be included in reconciliation legislation. The Byrd Rule restricts reconciliation bills to provisions with direct budgetary impact and prohibits extraneous measures that affect judicial processes or litigation markets in ways not primarily budgetary in nature.
Conference and Final Bill
Following the parliamentarian’s ruling, Senate leadership chose not to pursue procedural alternatives to retain the provision. The final version of the OBBBA, which passed the Senate 51-50 on July 1, 2025, with Vice President JD Vance casting the tie-breaking vote, omitted the litigation finance tax entirely. The House approved the Senate version on July 3, 2025, and President Trump signed the bill into law the following day. Notably, Senator Tillis was among three Republican senators—along with Susan Collins (R-ME) and Rand Paul (R-KY)—who voted against the final bill, primarily due to concerns about Medicaid cuts rather than the removal of the litigation funding provision.
Factors Behind the Provision’s Removal
Procedural Constraints
Under Senate reconciliation rules, only provisions with direct and substantial budgetary impact that comply with the Byrd Rule can survive scrutiny. The litigation finance tax raised fundamental questions about whether it qualified under these narrow parameters, ultimately leading to its disqualification by the parliamentarian.
Effective Industry Mobilisation
Senator Tillis himself acknowledged the effectiveness of the litigation finance industry’s lobbying campaign. The International Legal Finance Association and individual funders mounted a comprehensive effort to defeat the provision, engaging contract lobbyists across Capitol Hill. Tillis later remarked that he was impressed by the sheer amount of resources deployed against the measure, noting that one could scarcely walk the halls of Congress without encountering lobbyists engaged to oppose the tax.
Revenue Projections Versus Economic Risk
While supporters promoted the tax as a revenue-generating measure, projected receipts were modest relative to the bill’s overall fiscal impact. Critics argued that the potential to destabilise an emerging financial sector outweighed any anticipated revenue gains. Ultimately, the final OBBBA prioritised broader taxpayer-facing measures—including the SALT cap increase, capital expensing provisions, and charitable giving changes—over more speculative targeted excise taxes.
Implications and Future Prospects
Without the proposed tax, the litigation finance industry continues to operate under existing tax rules. However, the attempted reform has established a precedent that will likely inform future legislative efforts. Should the issue resurface, any new proposal would probably be more narrowly tailored, better justified under Byrd Rule constraints, and potentially limited to foreign-funded arrangements or structured with lower rates.
Senator Tillis Signals Intent to Revive the Proposal
Despite the provision’s removal from the OBBBA, Senator Tillis has indicated that he intends to continue pursuing legislation to tax litigation funders. Speaking at a Bloomberg Government roundtable in October 2025, Tillis stated, ‘We’re going to go after it,’ signalling his commitment to advancing a revised version of the Tackling Predatory Litigation Funding Act.
Capitol Hill observers consider the litigation funding tax reform among the most likely of the dropped OBBBA provisions to return in a future Congress. While Senator Tillis has announced he will not seek re-election in 2026, he remains in office through the end of his term in January 2027 and has expressed determination to advance this initiative. Any subsequent proposal would need to address the Byrd Rule concerns that led to the original provision’s removal, potentially through narrower targeting or alternative legislative vehicles outside the reconciliation process.
Conclusion
The proposed litigation funding tax represented an unprecedented attempt to impose substantial tax obligations on an industry that had largely operated outside traditional tax frameworks. The debate exposed fundamental tensions between competing visions of the American legal system: one emphasising access to justice and the ability of ordinary citizens to hold powerful interests accountable, the other focusing on system integrity, national security, and the prevention of litigation abuse.
Proponents of litigation funding argue that the industry democratises access to the courts, enables David to challenge Goliath, and ensures that meritorious claims are not abandoned simply because plaintiffs lack resources. Opponents counter that the industry encourages frivolous litigation, distorts settlement incentives, creates opportunities for foreign adversary exploitation, and benefits from inequitable tax treatment that rewards speculation over productive economic activity.
The provision was ultimately removed following the Senate parliamentarian’s Byrd Rule determination, combined with effective industry lobbying and the strategic decision to prioritise more broadly supported tax relief measures. Although the litigation funding tax did not survive in this legislative cycle, the issue remains very much alive. With Senator Tillis publicly committed to reviving the proposal and industry stakeholders now keenly aware of the regulatory and legislative landscape, the debate over taxing—or otherwise regulating—litigation finance is likely to feature prominently in future congressional sessions. The outcome will have significant implications for how Americans access justice, how litigation markets function, and how the nation addresses the intersection of foreign investment and domestic legal proceedings.
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