#MeTooTax : Ending the Tax on Sexual Harassment Victims

Sexual harassment victims are taxable on their recoveries. Recoveries for personal injuries that are not “physical” are taxable, and the Internal Revenue Service and most courts hold that the injuries arising from harassment are not physical. This is bad policy. Taxing a plaintiff’s recovery discourages lawsuits. And Congress, by requiring “physical injury” and dismissing “emotional conditions” as not physical, relied on mistaken science. Courts have perpetuated this error even as researchers now understand that extreme stress releases hormones that can cause serious physical injury. Congress should reverse the 1996 changes to section 104(a)(2) to provide that all compensatory damages for personal injury or sickness (including mental anguish, emotional distress, and pain and suffering) are exempt from tax. To avoid a subsidy for sexual harassment and help ensure a proper allocation between lost wages and compensatory damages, Congress should deny defendants the deduction for the damages or settlements they pay for personal injury on the grounds that these payments are not ordinary or necessary business expenses. To prevent employers from over-attributing a settlement to deductible lost wages, Congress could impose limits on the amount of a settlement that is attributable to lost wages