Around the water coolers of the Interwebs lately a number of lawyers took umbrage at a MinnPost story by Doug Grow regarding Gov. Mark Dayton’s budget proposal. The governor has proposed a sales tax on professional services (including legal services), and Grow’s article quoted bar association President Robert Enger that “taxing legal services will harm the middle class.”
What really sparked ire was Grow’s own reaction to the quotation. Among the insults lobbed from the peanut gallery of Grow’s article was his comment that the lawyers in Minnesota don’t care about the middle class.
It is easy enough to mock Grow for planting his flag so proudly at the summit of Mount Uninformed, but there is a more fundamental point here: We have not done a good enough job explaining what the downside of such a tax is, and why it is not only harmful to lawyers but to the public as well.
The downside of a tax, as Glenn Hubbard recently and simply commented on NPR’s “Intelligence Squared” debate on taxation, is that “if you tax something, you get less of it.” And he should know: Mr. Hubbard was the chairman of the Council of Economic Advisors under President George W. Bush, a former deputy assistant secretary for tax policy in the Treasury Department, and he is now dean of the Columbia Business School. More taxes on professional legal services means less people can afford them.
For small firms, of course, there are a number of issues involved in this. Of primary concern to us as small business owners is anything that takes effort away from providing legal services in favor of adding complications to the administration of the business.
The addition of a monthly sales tax accounting and reporting system would add a significant layer of complexity to a small business. Complexity adds overhead. Every unbilled hour a solo attorney has to invest in her business means an increase in the billable rate to maintain the bottom lin — yet another increased cost to the consumer of legal services.
More important, however, is the question of who is bearing the brunt of this cost. Like all sales taxes, a tax on services is inherently regressive: A greater percentage of the income of those in poverty is spent on sales taxes, as opposed to the wealthy.
While the state provides criminal defense attorneys to those who are too poor to hire an attorney — “too poor,” of course, being a relative term these days — parties in civil, family and housing court cases are going pro se in ever-increasing numbers. More and more, the price point of hiring a champion to do battle for you in the justice system is beyond the reach not only of the poor but the middle class as well. While big businesses, commercial litigants and the wealthy may be able to absorb the increased cost, there can be no doubt that Dayton’s plan has the potential to tax more Minnesotans out of the justice system.
Any time you make something more expensive there will be people who could afford the service before the price hike who cannot afford it after. The small firms and solo practitioners are the lawyers most likely to be affected by this, as they are the ones whose business survival is most closely tied to services for the poor and middle class. There will be people who paid for legal services before who now will be looking for pro bono legal services, turning to DIY solutions like LegalZoom, representing themselves or foregoing the justice system altogether.
There may be a way to help the poor and middle class while still raising revenue for a state that is facing a $1.1 billion deficit, but before I begin to spout a wildly idealistic plan, I should state that IRS Circular 230 requires me to inform you that I am not a tax attorney, have never been a tax attorney, and that although I did (somehow) manage to get an A in Individual Income Tax in law school, any resemblance the following idea has to any tax policy, sensible or not, is purely coincidental.
If our real issue is that the people hardest hit by the tax will be those who can no longer afford legal services, we should create greater incentive to provide those services for free. The ABA’s model asks 50 hours of pro bono services per year, and that’s a good thing. Unlike monetary donations to a nonprofit, however, this sort of charitable work is not tax deductible — but only because we say it isn’t. There’s no particular reason the state couldn’t, say, make a lawyer’s next 50 hours of pro bono work tax deductible, offsetting the increased numbers of people who can no longer afford legal services by creating incentive to provide those services for free.
Tantrums from people like Doug Grow are ensconced in the warm embrace of public opinion when we as lawyers do not demonstrate that we care about more than just our own profit line. There’s absolutely nothing wrong with trying to keep the cost to our consumers low. Like any small business, solo and small firms survive only when their consumers can afford their goods or services.
But there should be a broader discussion of how this increase in cost will affect the poor and middle class’ ability to get legal representation, and what we as lawyers can do to make sure that any tax increase does not fall hardest on those it will hurt most.
Contact Michael Kemp at email@example.com.